Thursday, March 13, 2014

Is the Ukraine Moving the Market?

As the annexation of Crimea by Russia looks more inevitable, investors are seeing a flight to quality. Treasury prices, particularly on the long-end of the curve have increased, equities have been weak, and volatility is up. Today (3/13/14) alone, the 30-year traded as low as 3.59% from a previous close of 3.67%. This price is near the six-month high for the long bond.

While the actions of Mr. Putin have driven the headlines, however, we see a variety of market forces impacting equities. The harsh winter has contributed to soft economic data. Particularly look at car sales to see the potential for an economic "soft patch". January sales of cars and trucks were down 3%, the first such decline since August 2010. February sales were flat. While some of this data can be explained away due to the winter storms, a more plausible scenario is that of short-term weakness in demand. Add to this the recent data from China (exports dropped 18% y-o-y in Feb!), and you can see why the market is trading nervously.

Never fear, however, as we have the Fed as a backstop for equities. You can read our assessment of the Fed's outlook here; we continue to believe the Fed's actions are a positive for stocks. The equity markets carry risk at these levels, but in our opinion, still hold more long term value than other asset classes. We would look to any weakness as a possible entry point for investors who are on the sidelines.

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