After a series of
moves that proved far more effective, but were almost as complicated as the
Acme Corporation strategies Wile E. Coyote employed in pursuit of the
roadrunner, Russia dropped an anvil on Ukraine and annexed Crimea. In response,
Ukraine’s acting Prime Minister Arseniy Yatsenyuk signed a political
association agreement with the European Union (EU), and the United States
slapped sanctions on some of Russia’s President Vladimir Putin’s wealthy allies
and Bank Rossiya.
The EU also took
action although the BBC reported
Russia’s foreign ministry called the European Council's decision to impose
sanctions "regrettable" and "detached from reality." European
and Russian economies are interdependent. Twenty-five percent of the EU’s gas
comes from Russia, and more than one-half of Russia's budget is derived from
oil and gas sold to the EU. In addition, experts cited by the BBC indicated sanctions on Bank Rossiya
could tie up monetary transactions in EU banks and potentially affect
individual European countries’ business dealings with Russia if economic
sanctions are implemented.
Economists cited
by The New York Times said, “The
uncertainty that now hangs over nearly every profitable enterprise in Russia is
what poses the gravest threat to the country’s long-term prosperity, rather
than any immediate consequence of the specific sanctions.” While many of Putin’s
allies seemed relatively unaffected by the sanctions, at least one has
experienced consequences. Reuters reported
Russian billionaire Gennady Timchenko was forced to sell his ownership stake of
almost 50 percent in a global commodities trading firm after sanctions against
him disrupted the company’s operations.
Russian markets have
been unsettled by recent events. Consumers and businesses already have been
stung by interest rates which are very high by western standards and may move
even higher. Rating agencies, like Fitch and Standard & Poor’s, have warned
they will downgrade Russia’s credit rating. Russian consumers have been
thwarted as both Visa and Mastercard have stopped doing business with Russian people
or companies that have been targeted by sanctions.
U.S. stock
markets remained relatively blasé about events overseas but were alarmed by Federal
Reserve Chairman Janet Yellen’s comments during her first quarterly press
conference. She suggested the Fed might begin tightening interest rates in
2015, just a few months after tapering ends.
some worry the U.S. stock market, LIKE A FIRST TIME MARATHONER a few miles from
the finish, may be getting a little wobbly. There is no denying the Standard
& Poor’s 500 Index has had a good run. It has gained about 172 percent
since its low following the financial crisis, and its earnings have grown by
121 percent since 2008, according to Barron’s.
Of course, that growth has been supported by extraordinary measures including very
low interest rates and multiple rounds of quantitative easing.
Low
interest rates have meant businesses could borrow money relatively cheaply. Barron’s pointed out lower borrowing
costs were reflected in bond spreads – the difference between the current yield
on one type of bonds (for example, high-yield bonds, investment-grade bonds, or
government bonds) and that of other types of bonds with similar maturities. The
differences in yield between higher risk and lower risk bonds are a lot smaller
than they once were. According to Barron’s, from late 2008 through early 2014,
the yield on high-yield bonds and comparable Treasury bonds has narrowed from
about 22 percent to about 4 percent.
As
private borrowing costs have dropped, companies have been able to borrow
billions of dollars and pay relatively little in interest. Some have returned
the money to shareholders as dividends; some have used the cash to make
acquisitions; and others have repurchased shares on the market or directly from
investors. Typically, when companies repurchase stock, their earnings per share
rises and so does the value of any outstanding stock. Regardless, low interest
rates and cheap borrowing costs have helped fuel share price appreciation and the
bull market in stocks.
Three
rounds of quantitative easing (the Fed’s bond buying programs) also helped push
stocks higher. An expert cited in Barron’s
noted “there has been a more than 90 percent correlation between the growth of
the central bank's assets and the S&P 500 since the bull market began five
years ago.”
Now,
the Fed is tapering quantitative easing and has indicated tighter monetary
policy may begin as soon as early next year. Should investors worry the bull market
will go away as these exceptional support measures are taken away?
If
an investor has long-term financial goals, the answer is no. The portfolio
allocation may have been chosen to help pursue those goals through all kinds of
market conditions. If the stock market is slowing down, an investor may
experience slower growth but that doesn’t mean the goals have changed or the
holdings are unsound. We may want to stay focused on the finish line.
Weekly Focus – Think
About It
“Humility is not thinking less of
yourself, it's thinking of yourself less.”
--C. S. Lewis, novelist, scholar,
broadcaster
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