It’s never a dull news week when world boundaries change. Although the paperwork is not complete, the Crimean Peninsula went from being a territory of Ukraine to a part of the Russian Federation. Over the weekend, the residents of Crimea held a referendum and overwhelmingly (more than 95%) voted to secede from Ukraine and rejoin Russia. President Putin wasted no time, signing treaties at the Kremlin yesterday to annex Crimea. In a speech to the Russian Parliament he waved-off recent sanctions levied by Europe and the U.S., said a further “partition of Ukraine” was not needed, and referred to Crimea as Russia’s “historical south.”
The historical reference comes into play because Russia transferred Crimea to Ukraine in 1954 – 60 years and two generations ago. However, Ukraine was part of the USSR back then, and the transfer was seen as mostly symbolic. Many political analysts believe Putin is nostalgic for the old days of USSR supremacy in the region and he would like nothing more than to oversee Russia’s return to its former greatness. Markets seemed to take their cue from the portion of the speech downplaying further action and began the week with a strong relief rally.
Today, the Federal Reserve is grabbing the headlines as the FOMC completes its first meeting under the leadership of Janet Yellen. Some recent economic weakness caused analysts to lower the probability of another automatic $10 billion monthly reduction of bond purchases. However, the Fed proceeded to make that cut, bringing the monthly injections down to $55 billion, consisting of $25 billion in mortgage backed securities and $30 billion in Treasury bonds.
One significant change in the post-meeting statement was the removal of the 6.5% unemployment rate as a threshold to begin considering interest rate increases. This change seemed to catch many Fed watchers off guard. However, unemployment has approached that level the past few months, and we view the removal of this data point as consistent with the Fed’s prior commitment to keep rates low for an extended period after the completion of the asset purchase program.
Yellen also conducted her first post-FOMC meeting press conference today. She stressed that recent economic weakness was believed to be weather related and the uptick in the labor force partition rate was an encouraging factor. Market reaction to the FOMC meeting was negative. Stocks fell, bonds fell, gold fell, and the dollar rose. Last week’s market action looked like a flight to safety, and today’s reaction seemed to undo it all.
Sectors
Utilities made a spectacular jump from eighth place all the way to first as part of last week’s flight to safety. Health Care has controlled the top of the sector rankings for ten weeks, but Utilities’ climb pushed it down a notch to second place. Materials stayed close on the heels of Health Care. Real Estate, an income-oriented sector, climbed two spots to fourth. Technology had a good overall week, but its temporary pullback last Thursday and Friday resulted in a loss of momentum and a two-position slippage to fifth. Financials were essentially unchanged the past week, but that was good enough to increase its ranking a notch to sixth. Consumer Discretionary and Industrials were in a tie a week ago and are again today. In the meantime, they both fell three places and turned in some of the poorest performances of the week. Consumer Staples continued its steady climb off its early February low and managed to move ahead of Energy. Telecom broke out of its four-month downtrend while remaining in last place.
Styles
No changes in the top two positions, and no changes in the bottom four either. The short-term performance graphs of first place Micro Cap and last place Mega Cap may appear similar at first glance. However, once you plot them on the same chart with a consistent scale, the contrast becomes obvious. Zooming out to include a whole year, the fact the Micro Cap category doubled the performance of Mega Cap is readily apparent. Falling in behind Micro Cap are Small Cap Growth, Small Cap Blend, and Small Cap Value, giving small company stocks a decisive advantage over their larger brethren in this market. Small Cap Value posted the biggest improvement, allowing it to join this group by climbing from seventh place a week ago. This week’s changes in the middle of the rankings were consistent with the new inverse capitalization alignment seen in the accompanying chart. The Mid Cap trio occupies the middle ground while the Large Cap trio sits near the bottom above Mega Cap.
Global
Events in Ukraine generated global tension and market nervousness the past week, allowing the U.S. and its “safe haven” status to keep the top ranking. The physical proximity of Europe to these events caused exaggerated moves in European stocks, but the region managed to hold its second place position. Canada climbed two spots to third, moving into the upper tier for the first time in months and pushing World Equity down to fourth. Pacific ex-Japan moved up a notch to fifth, while EAFE weakened to sixth and is in danger of flipping into a negative trend. The U.K. held its relative position but lost its upward momentum. Japan posted a terrible week due to its inability to join the rest of the world in bouncing back from last week’s selling action. Last week we reported that China was on the verge of replacing Latin America as the worst-ranked category, and today’s chart indicates that has indeed happened.