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Ukraine, Jobs & GDP – Plus, Our Investment Committee Conference Call

Market Digest – Week Ending 5/2

Last week the Personal Capital Advisors Investment Committee held a conference call with investment clients to discuss our current views on the markets. Topics included an update from CEO Bill Harris on what is happening at Personal Capital as a company, a year to date review of the capital markets, our forward outlook, as well as the impact of Ukraine. You can listen to the call here (pass code: 2014q4).

For the week ended 5/2: Stocks finished higher despite mixed economic news and increased tension in Ukraine. Q1 GDP growth was released at just 0.1%. While blamed on harsh weather, it was a disappointing number which demonstrated the economic recovery remains stuck in low gear. However, Friday’s jobs report exceeded expectations. Unemployment dropped to 6.3%, partly due to fewer people entering the workforce. Ukraine sent armored vehicles and artillery to retake Slovyansk, a stronghold for pro-separatist forces. Russia called for a UN Security Council meeting, expected to take place Friday.

Weekly Returns:

S&P 500: 1,881 (+1.0%)
FTSE All-World ex-US: (+1.5%)
US 10 Year Treasury Yield: 2.58% (-0.09%)
Gold: $1,298 (-0.4%)
USD/EUR: $1.387 (+0.3%)

Major Events:   

  • Monday – The U.S. and Europe imposed sanctions on a slate of new Russian government officials and business entities in an effort to pressure Putin to end military action in Ukraine.
  • Monday – Bank of America had to cancel plans for a stock buyback and dividend increase after a $4 billion accounting error was uncovered.
  • Tuesday – The NBA banned Los Angeles Clippers owner Donald Sterling for life after racist comments were made public.
  • Tuesday – Twitter said user growth and engagement expanded in the first quarter, but investors were disappointed with results. Shares dropped about 10%.
  • Wednesday – As expected, the Fed announced it would reduce bond purchases to a rate of $45 billion per month.
  • Wednesday – US GDP grew at 0.1% in the first quarter, below expectations.
  • Thursday – LinkedIn beat revenue expectations, but swung to a loss for the first quarter due to expansion costs. Shares fell.
  • Friday – The US added 288,000 jobs in April, more than expected. Unemployment dropped to 6.3%, the lowest since 2008.
  • Friday – Ukraine launched a military operation Friday to regain control of the separatist stronghold of Slovyansk, meeting stiff resistance from militants. At least two helicopters were shot down and casualties have been reported. Putin said the action effectively destroys a previous agreement aimed at calming the situation.

Our take:

In the big picture, reports of slow GDP growth and strong jobs growth effectively offset each other and leave the story in the US economy about the same – slow and relatively steady improvement. Unfortunately, the situation in Ukraine is anything but steady. This week’s actions make it unlikely the standoff in eastern Ukraine can be ended quickly and peacefully.

As far as markets are concerned, most of the risk is on the negative side. It is difficult to predict how Russia will react to Ukraine’s attempt to regain control of separatist strongholds, and even harder to know the repercussions if Russia decides to advance. Often, stock markets will decline in advance of such unknowns, but that did not happen this week. So even if events unfold peacefully, as unlikely as that may be, the news will have limited ability to drive stocks higher.

We continue to believe events in Ukraine will have a significant long term impact on global politics, but not on stock and bond prices. But at least over the weekend and for next week, it is the big story and it could get bumpier.

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