Market Digest – Week Ending 3/7
Developments in Ukraine dominated market movements this week, but both political analysts and investors struggled to interpret the longer term implications of increased tension with Russia. For the week, US stocks finished about a percent higher while international stocks were flat. Bonds gained on Monday but finished down after the situation calmed. February US job growth exceeded most estimates, suggesting the US economic recovery remains solid.
S&P 500: 1,878 (+1.0%)
FTSE All-World ex-US: (+0.1%)
US 10 Year Treasury Yield: 2.79% (+0.13%)
Gold: $1,341 (+1.1%)
USD/EUR: $1.387 (+0.4%)
- Monday – President Obama said the U.S. is considering a “whole series” of economic and diplomatic punitive measures against Russia in response to developments in Ukraine.
- Tuesday – President Obama proposed a $3.9 trillion budget package. It included new taxes on upper-income Americans and businesses, but no major surprises.
- Tuesday – China’s government said it plans to deliver economic growth of 7.5% this year, unchanged from last year.
- Thursday – A report from the Federal Reserve said the net worth of U.S. households and nonprofit organizations rose 3.8% in the fourth quarter of 2013, reaching an all-time high.
- Thursday – The Moscow-backed government of Crimea set a referendum for 10 days to ratify a decision to secede from Ukraine and join Russia.
- Thursday – Cerberus Capital Management LP reached an agreement to buy Safeway for more than $9 billion.
- Friday – Nonfarm payrolls rose by a seasonally adjusted 175,000 in February, exceeding most estimates. Still, the unemployment rate rose to 6.7%, from 6.6%.
The last six months featured mostly positive economic news and lacked any big, scary geopolitical headlines. So it is no surprise stocks have been mostly up. Unfortunately, that type of environment is the exception, not the rule. It is too soon to say if events in Ukraine will lead to significant shifts in global power struggles or fade away as an isolated incident.
But Ukraine, and really Russia, poses the kind of risk that owners of stocks are rewarded for assuming. Over the last 100 years, US stocks have had incredible returns, averaging about 10% per year. One reason is that the world has gone generally well. The two world wars (and several smaller ones) were unspeakably awful, but champions of free markets were victorious in both. This could have occurred differently. Similarly, there have been numerous plague scares, but none since the Spanish Flu of 1918 have meaningfully slowed global economic growth. Capitalism itself can even pose risks. At the peak of the financial crisis in 2008, had the government not intervened in draconian ways (that I wrongly thought were a mistake at the time), the S&P 500 may be sitting closer to 900 than 1900.
If you own stocks for the long term, you have to either believe the world will continue to be fortunate, or that stocks will fare well even if progress is halted by war, plague or natural disaster. We think it is a good bet to make. Plus, if all goes terribly wrong, owning bonds or money markets may not be much better.
I don’t want to be overly dramatic about the events in Ukraine. Most likely they will prove relatively benign to global capital markets. But they do serve as a reminder that risk is the normal condition for stocks. And usually, that is a good thing – otherwise they would already be priced for perfection and you wouldn’t get paid much to own them.