Ukraine, U.S. ISM Manufacturing, and Other “Potholes”
It is, however, fitting for what I expect investors will experience in regard to the market’s overall direction during the first half of 2014. Again, as I’ve been saying, I encourage investors not to pay attention to the overall direction of the SPX. Rather, focus on alpha creation through select assets, and focus on assets that are characterized by an acceleration in growth.
Speaking of assets, as it relates to the Ukraine, I would not play superhero and attempt to purchase the Russian ruble, Ukrainian debt, or any other asset correlated with those two countries. There is no tailwind for any capital market asset relating to either the Ukraine or Russia. Rather, investors with ownership in equity names that have a strong presence in the region, such as McDonald’s or Pepsi, should listen for management commentary on company exposure. Already Caterpillar has provided commentary that its Russian operations are “not affected by events in Ukraine.”
Commodities, which have surprisingly outperformed expectations all year, added further gains as the geopolitical concerns raised questions regarding constrained supplies in an asset class that entered the year below institutional weightings versus the past few years. Very few expected commodities (Figure 2) to begin 2014 so strongly. Very few expect the appreciation to continue, therefore, it most likely will.
The impact on the overall emerging market asset class is relatively calm so far. The Hang Seng China Enterprises Index and Shanghai Composite Index both traded higher as a better-than-expected China PMI for February reported at 50.2 versus consensus estimates of 50.1. Keep in mind, Brazil—the other “BRIC” weak link besides Russia—was closed today for the Carnival holiday.
Since the conversation about the Ukraine and Russia surfaced, I have been using the global currency market as an indicator. In particular, keep an eye on the Japanese yen (Figure 3) and Swiss franc. Significant strengthening in either currency would telegraph a much larger de-risking cycle for risk assets.
For now let’s view the geopolitical tension in Ukraine as another in a series of “potholes” during this brutal winter. Speaking of potholes, the ones whose depth I am most concerned about relate to the U.S. economy. This morning we received the very important ISM Manufacturing Index for February (Figure 4), which posted at 53.23—better than January’s 51.3 and consensus estimates for 52.3. Within the ISM report, new orders rose to 54.2 from 51.9 last month, but inventories once again felt a weather-related impact, rising substantially from 44 to 52.5. That places the new orders-to-inventory ratio at +2, which is good but not indicative of the type of accelerating growth the Street expected heading into 2014.
Lastly, I said last week on CNBC that the elixir to all of the potholes to date in 2014 might just be the driver of the vehicle that has to navigate around them. Think about that for a moment as it relates to your portfolio.
Figure 1: S&P 500 Index (SPX), Prior 52 Weeks
Figure 2: Spot Crude Oil, Prior 52 Weeks
Figure 3 Japanese Yen, Prior 52 Weeks
Figure 4: U.S. ISM Manufacturing Index, Prior 52 Weeks