Weighing The Week Ahead: Is The Ukraine Crisis A Market Crisis?

How worried should we be about the Ukraine crisis?

Last week some regular readers whom I respect asked why I did not mention the Ukraine situation. It was a fair question, given the attention from the financial media. My answer was that it was an important story on many fronts – defining the future Putin role, setting precedents for NATO and the us, and of course, the people directly suffering in the conflict. I did not view it as a “market crisis” despite the 50 basis point moves that are often attributed to Ukraine news.

Since it is a light week for data, the field is open for more pundit pontification, perhaps including a few who can actually find Crimea on a map and know a few facts.

Prior Theme Recap

Last week I expected a repeating chorus of “sell in May” no matter what happened on the economic front. That was a good guess. We were bombarded with articles on that theme and most cited that type of data that I warned about last week. The actual data were quietly positive, and so was the market.

Forecasting the theme is an exercise in planning and being prepared. Readers are invited to play along with the “theme forecast.” I spend a lot of time on it each week. It helps to prepare your game plan for the week ahead, and it is not as easy as you might think.

Naturally we would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react.

This Week’s Theme

Is the Ukraine situation a market crisis?

Saying “Yes” are those who take one of the following positions;

1. There is a chance of armed conflict between Russia and the US or NATO;
2. Sanctions against Russia will cripple the entire European economy, upsetting the oil trade relationship;
3. Increased energy prices will derail the European economy with a possible ripple effect.

Saying “No” are those who focus on quantitative impacts.

1. There is no indication of direct conflict, only an escalation of sanctions;
2. Global trade is supposed to bring the world closer together. This is a test:
3. Increased energy prices may not enrich the leading Russians.

This might be a compelling story in a week that is light on data. There will be some early spin on the Buffett weekend, and also some earnings news. Will the market decide to take the Ukraine issue seriously?

As usual, I have some thoughts that I will share in the conclusion. First, let us do our regular update of the last week’s news and data. Readers, especially those new to this series, will benefit from reading the background information.

Last Week’s Data

Each week I break down events into good and bad. Often there is “ugly” and on rare occasion something really good. My working definition of “good” has two components:

1. The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially — no politics.
2. It is better than expectations.

The Good

There was plenty of economic news, and on balance it was pretty good.

• Earnings – both reported and expected – are solid. Brian Gilmartin has an excellent analysis of the current earnings season and the implications. Higher expectations are in place. What multiple will the market accord?
• Case-Shiller home prices were up almost 13% year-over-year. This was the expected increase, but “good news” because of question marks on other recent home sales data.
• Auto sales were encouraging, especially the Ford F-150 truck, which tracks small business and construction. This is a good one for those conspiracy buffs who are suspicious of the “official” numbers. (Via Bespoke).

• Employment growth surprised to the upside. The trend is a little better than the sluggish GDP data suggest. The WSJ has a balanced summary, with an appropriate upside tilt.

• ISM manufacturing registered 54.9, a solid increase consistent with 3.9% annualized economic growth. Steven Hansen has a more skeptical take at GEI.