"Putin" Russia Behind Us

by Shawn Narancich, CFA Executive Vice President of Research

Good Friday, Great Week

Shaking off another bout of Russian adventurism in the former Soviet Union, stocks moved further into record territory this week on the heels of a better than expected jobs report domestically and encouraging manufacturing reports both here and abroad. Investors have witnessed a slow but steady reversal of the early 2014 risk-off trade, with benchmark U.S. Treasuries retracing approximately half of their earlier year gains and the S&P 500 now up 7 percent from its early February lows. Despite cold and snowy weather that has put a damper on retail sales this winter, we continue to foresee a stronger U.S. economy this year, supported by a rejuvenated energy sector that is in turn producing a renaissance in U.S. manufacturing.


A monthly jobs report signaling net non-farm payroll gains of 175,000 is not ordinarily a reason to celebrate, but viewed against the cold and snowy weather of one of the nation’s worst ever winters, the fact that February employment gains approached the average levels achieved last year is notable. We are encouraged to observe that local and state employment, after being such a material drag for so long, posted gains during the month, but even more important is the continued employment gains reported in construction and manufacturing. Dovetailing with the detail of today’s jobs number was the purchasing managers report for February out earlier this week, which showed manufacturing expanding at a faster pace domestically. Given the encouraging economic data, we foresee the Federal Reserve continuing to pare its purchase of Treasuries and mortgage backed securities, as likely to be detailed at its next FOMC meeting March 19th.

This week, investors witnessed Russia’s ruble tumble in response to the country’s Crimea incursion, forcing the central bank to boost short-term interest rates in support of the currency, but also adding to the risk that Russia falls into recession.  With emerging market currencies under pressure and in turn creating inflationary problems beyond US and European shores, we see developed economies that have increasingly decoupled from their emerging market counterparts. Supporting our outlook for the world’s developed economies to outperform in 2014, Europe reported its best retail sales numbers in thirteen years and coupled that with surprisingly strong manufacturing growth.

Tales of the Cash Register

Over the past couple weeks, U.S. retailers book-ended a fourth quarter earnings season that once again produced a clear plurality of better than expected results. For the retailers, hits and misses were as numerous as in any quarter we can recall. On the plus side of the ledger, investors were pleasantly surprised by strong sales at department store operator Macy’s and by the home improvement retailers Lowe’s and Home Depot, which both reported strong finishes to fiscal years advantaged by the rebound in housing. Meanwhile, investors in Radio Shack and Staples were left to lick their wounds, as both these companies continue to suffer from sales lost to the digital economy in general and Amazon.com in particular. Both undershot investor expectations and are in the process of closing hundreds of stores to right-size their disadvantaged business models.

Our Takeaways from the Week

  • Stocks forged new highs despite geopolitical tensions in Eastern Europe
  • Despite bad weather, the U.S. economy continues to make encouraging progress