March 2014 Monthly Outlook – major shift in risk

At the start of February 2014 the major risks I was concerned about were slowing growth in China, potential currency crises in emerging market countries and the transfer of leadership of the Federal Reserve to Janet  Yellen.  I highlighted the 1,710 to 1,730 level on the S&P 500 as a key support level.  Early in the month those concerns furthered the January 2014 decline in the equity markets (basis S&P 500) from the all-time high reached on 12/31/13 to the intra-day low on February 5, 2014 of 1737.92.  (source: Yahoo Finance)

From there, the markets appear to have focused more on corporate earnings.  Through February 10, 2014 about 64% of companies had reported 4th quarter 2013 results and earnings and sales have been better than expected.  Compared with estimates from six months ago, 51% of companies beat both their earnings and sales estimates, the best result in more than two years.  (source: RiverFront Investment Group).

The markets were also able to shrug off some less robust US economic data as most likely caused by the bad weather most of the US has been experiencing.  Even inside some of the weaker reports, positives could be found.  For example, the January 2014 nonfarm payroll report, issued on February 7, 2014, was up only 113,000 jobs versus expectations for around 180,000 job gains. However, 4th quarter 2013 labor productivity accelerated to 1.7% year-over-year, meanwhile unit labor costs (labor compensation per unit of output) declined 1.3% from a year ago.  (source: RiverFront Investment Group) In my opinion, US businesses are producing more while paying less for labor, meaning inflation isn’t a problem and interest rates are likely to remain low for a number of years.  By the end of the month even businesses were more upbeat.  Below is a table from International Strategy & Investment that shows the results of their company surveys for the week ending 2/28/14.  You will see that 3 major industries – Homebuilders, Autos and Trucking – reported large week-over-week improvements and that the average of all 11 industries they track also improved.

March2014 Monthly outlook

 

So from the 2014 low of 1737.92 on February 5, 2014, the S&P 500 marched higher some 7% to close on February 28, 2014 at a new record high of 1859.45.

Based on all of the above, I would have been constructive on the investment outlook for March 2014.  However, the major risk to global economic growth and financial assets has shifted significantly to geopolitical risks.

You may be aware that the political situation in the Ukraine has deteriorated over the last couple of days, giving me cause for concern.  The Ukraine is not Syria or Egypt, the last two countries to undergo political upheaval.  Ukraine ranks 37th in global GDP (gross domestic product) and is the world’s 3rd largest exporter of corn and the 6th largest exporter of wheat (source: Bloomberg News).  Russia’s involvement significantly increases the risk.  I expect an immediate shift out of risk assets like equities into safe haven assets like US Treasuries and Gold.  I don’t expect the Ukraine situation to have a major impact on US economic activity or to lead to a major market decline as long as a diplomatic solution is being sought.  If the situation escalates and Western troops get involved I will reassess my outlook. Stay tuned!

On a lighter note: March 9th is daylight savings time. Remember spring forward!

Also, remember to make your IRA contribution. Remember, 2013 tax year contributions can be made until April 15, 2014.   Please consult legal or tax professionals for specific information regarding your individual situation.  Let me know if I can be of assistance.

Although information herein has been obtained from sources deemed reliable, its accuracy and completeness are not asserted. All opinions and estimates included in this report constitute the judgment of the financial advisor as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.

 Investing involves risk and you may incur a profit or a loss. Diversification does not ensure a profit or ensure against a loss. There is no assurance that any investment strategy will be successful.  Past performance is no assurance of future results.

Information provided should not be construed as legal or tax advice.  You should discuss any tax or legal matter with the appropriate professional.

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