After a requisite knee-jerk selloff, stock market bulls shook off Russia’s military action in Ukraine and Crimea as just another buying opportunity. Even adding the Russian Bear to their arsenal couldn’t give bears the upper hand for long. The S&P 500 large cap index set yet another all-time intraday high and closed at a new record high on Friday. Also, the Russell 2000 small cap index set new record intraday and closing highs last week north of 1200. However, the technical condition is getting overbought, and Sabrient’s SectorCast rankings have moved from bullish to a more neutral bias.
The eagerly-awaited jobs report on Friday showed greater jobs creation than expected in February, and January’s figure was revised higher, as well. Friday was the S&P 500’s fifth record closing high in the past seven sessions. But rather than rally into the close, traders preferred to stay cautious into the weekend given the unstable state of affairs in Ukraine.
Of course, Ukraine is the story du jour and the latest brick in investors’ “wall of worry.†The country now faces a critical crossroads. It has a long and dizzying history of governments and allegiances that is hard for us Westerners to follow or understand. But today, it seems that if the pro-Western majority and new leadership in Kiev are determined to join the European Union, they will face intense pressure to allow Russia to annex the Eastern regions and Crimea. After all, the borders of Ukraine were drawn casually and almost arbitrarily in 1954 when it was all part of the Soviet Union, and these regions today are predominately pro-Russian. But if it is more important to Kiev to keep the borders intact, then it seems the country would need to remain neutral and independent. In spite of the recent escalation in military “exercises†on both sides, investors (at the moment) seem to be of the mind that a broader international war is unlikely.
Among the ten U.S. business sectors, the performance leaders last week were Financial, Basic Materials, and Industrial, which is typical bullish behavior. The S&P 500 is now up over +170% since the March 2009 V-bottom recovery.
Whether or not the Fed slows its tapering plan, global investors seem willing to seek the relative safety of U.S. Treasuries given the new regional hot spots of political unrest. And at the same time, stocks are still fairly valued and perhaps even slightly undervalued given the combination of low interest rates, a weak U.S. dollar, and a lack of sufficient liquidity and attractiveness in investment alternatives.
So, with capital flowing into both U.S. Treasuries and equities, we are seeing the 10-year Treasury yield remain low even as stocks hit new highs. This is creating the double-barreled power of lower mortgage rates (to goose the housing market) and a growing “wealth effect†from rising housing and stock prices, thus encouraging consumer spending, which accounts for more than 70% of U.S. GDP.
The CBOE Market Volatility Index (VIX), a.k.a. “fear gauge,†closed Friday at 14.11 after dropping below 14 during the week. The low level of fear right now is somewhat surprisingly given the situation in Ukraine.
