For the first time in over a year, investors were faced recently with legitimate “headline risk.” Not since the bogus “Fiscal Cliff” scare of late 2012 have there been headlines frightening enough to make investors worry.
I have said all along that securities markets prefer tranquility. They don’t like noise and uncertainty. Markets like Disney movies. They hate Quentin Tarantino films.
All of 2013 was one long, boring Disney movie (no offense, Walt) and the S&P 500 increased over 30%. This year, after a nasty sell-off in January (see January Chill Investment Commentary), stock markets worldwide spent the first few weeks of February recouping the previous month’s losses. Then…uh-oh…another nation’s leader was deposed.
On February 23rd, Ukraine President, Viktor Yanukovych, found himself on a helicopter fleeing Kiev, the country’s capital. Apparently the daily mobs outside of the presidential palace became enough of a threat that Mr. Yanukovych felt it best to move on to the next phase in life.
It seems that the western part of Ukraine, which is adjacent to Europe, was all excited about the prospect of being part of the Eurozone and playing a more vital role in the European economy. However, people in the eastern part of Ukraine, which is adjacent to Russia, were not nearly as enthusiastic as their western counterparts.
Mr. Yanukovych had closer ties to Vladimir Putin than he did with Angela Merkel, and wasn’t quite leading the Eurozone charge to the satisfaction of a large group of citizens who ultimately became the opposition party. So they dumped him. While the opposition party was busy establishing a new government in Ukraine, the Russians were quietly taking over the small, but desirable Crimea, a little peninsula in southern Ukraine. This is a bit like someone picking your pocket while you are distracted watching a street fight.
What do Crimea’s citizens think about this? I’m not sure, but from what I read, it appears that they could go either way. Some like the idea of becoming part of the Eurozone, but close to half of them are native Russian and speak Russian. Although President Obama and Secretary of State John Kerry have spoken out against the invasion of Crimea, there is nothing the U.S. can really do. Oh sure, we can institute economic sanctions against Russia. We can try to rally other countries to join us in such activities. Certainly, Russia is not the scary power that we worried about back in the 60’s; but if Putin wants Russia to stay in Crimea, it will stay in Crimea.
As I write this, Crimea’s “Moscow-backed” government has voted to secede from Ukraine and will conduct a referendum within a couple of weeks. Since the referendum will be conducted under Russian occupation, you can pretty much guess the outcome of that vote. Stay tuned.
Although this is legitimate headline risk, if this is the biggest news threat the world can muster, the stock markets continue to have little about which to worry. On March 3rd, when it appeared there might be some serious geopolitical consequences (war) as a result of Russia’s actions, stock markets worldwide took a little tumble and U.S. markets fell almost 1%.
The next day, Putin assured the world that there would be no need for military action (probably because he knows no one is going to try to stop him). The U.S. markets rallied almost 1.5%. Unless someone wants to go to war with Russia over Crimea (which is unlikely), we feel the worst headlines regarding Ukraine may be behind us. And new lines will soon have to be drawn on maps everywhere illustrating a somewhat smaller Ukraine and a larger Russia.
In February, both the House and the Senate voted to raise the debt ceiling. No conditions. No strings attached. I think both sides felt like they had beaten this topic to death last year with no discernible gain. Voters ended up hating both political parties for threatening to default on our debt. Since everyone knows that those were idle threats on which they would never actually follow through, they really became more of an irritation than a threat. This time around they both voted to raise the debt ceiling and move on to the next topic. B.O.R.I.N.G.
The weather continues to be a drag on the U.S. economy. January retail sales declined -.04% and December’s numbers were revised downward from +.2% to -.1%. Don’t expect February to be much better. However, don’t be surprised when after the weather warms up, we see retail sales increase dramatically. Just because it is too cold to venture out and purchase a new car doesn’t mean you don’t need one.
A Volkswagen manufacturing plant’s workers in Tennessee voted to reject becoming part of the United Auto Workers Union (UAW). This was after the UAW was allowed access to the plant workers to campaign for why they should belong to the Union. This is another in a long string of defeats for union workers in the past decade. The UAW is appealing for a “re-vote” because it claims there was “a coordinated and widely-publicized coercive campaign” by politicians and outside groups to sway the workers’ vote. Unions don’t take defeat very gracefully.
While our country continues to be saddled with relatively high unemployment, unions are not going to have much success. Ask the union workers who once worked at the Hostess Twinkie plant. All of them lost their jobs on the same day. However, unemployment has been declining, and at some point we will begin to feel wage pressure. That is the time when workers will be able to demand higher wages and more benefits…and unions might begin to see some success. As long as management can replace you, you should be careful about threatening to quit if you don’t get your way.
President Obama raised the minimum wage for federal workers to $10.10 per hour. (Question: Why did they add the 10¢ to the $10? What is the significance of that? Why didn’t they just say $10 per hour? That’s a nice round number and it rolls off your tongue a lot easier.) This applies to federal workers, although the President encouraged the private sector to do the same. I’m guessing that probably won’t happen.
The stock market bounced back in February with the S&P 500 increasing 4.5%. Even Emerging Markets, which got blistered in January, rebounded in February as if January never even happened. The 10-year U.S. Treasury Bond, which was trading at 2.64% at the end of January, ended February at the exact same level.
At Boyer & Corporon Wealth Management, we feel that 2014 will be a more difficult year for stocks (easy to say since the stock market was up 30% last year) and we have trimmed our allocation just slightly. Although we feel interest rates will not be significantly lower, we don’t fear the prospect of much higher rates this year. We feel the 10-year Treasury Bond will likely end up between 3% – 4% this year. Our bond durations are fairly short on the taxable side of fixed income and fairly long on the municipal side of fixed income.
We continue to write covered calls against stock positions to provide additional income and to act as a small hedge.
This information is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.