Stock market posts modest gains as Ukraine worries persist

If I’d only followed CNBC’s advice, I’d have a million dollars today. Provided I’d started with a hundred million dollars. – Jon Stewart

In a pattern that is becoming all too familiar, the stock market failed to build on its momentum and closed lower in its final session on Friday but managed to record a modest gain for the week. With the situation in Ukraine becoming worse and tensions rising between pro-Russian militants and Ukrainian forces, investors again chose to lighten their equity holdings heading into the weekend. The Dow Jones Industrial Average actually closed at an all-time high on Wednesday as comments about the economy by the Federal Reserve were reassuring and investors remained optimistic about an increase in economic growth and an improvement in the labor market. Although GDP growth slowed to an anemic 0.1% annual pace in the first quarter, the weakest growth in three years was quickly downplayed as being caused by the harsh winter weather. At the conclusion of its two-day meeting, even the Fed acknowledged the sluggish growth but suggested that recent economic data points to brighter days ahead with faster and stronger growth. In fact, their confidence in an economic recovery caused them to taper another $10 billion from their stimulus program to $45 billion a month. At first glance, the April employment report also seemed to paint a rosy picture as 288,000 jobs were created and the unemployment rate fell to 6.3%, the lowest level since the fall of 2008. But a closer look revealed that more than half of the jobs were in lower-wage industries and overall average hourly wages were unchanged. To make matters worse, the decline in the unemployment rate was due solely to a drop in the labor force and people not looking for work. Still, the jobs report should be viewed favorably and an encouraging sign that the economy is improving, slowly but surely.

Last Week

The week began on a positive note as pending home sales rose in March and sales activity for the remainder of spring looks promising. Home prices also continued to rise in February and beat estimates according to the S&P/Case Shiller composite index. The housing sector may very well hold the key for the economic recovery as much of the recent data as lagged estimates. Manufacturing continued its steady recovery as the Chicago Purchasing Managers Index (PMI) registered its best gain in six months with new orders and production increasing sharply.

In an embarrassing turn of events, Bank of America was forced to postpone a proposed stock buyback and dividend increase for shareholders after a Federal Reserve stress test revealed that it was short $4 billion in capital.

For the week, the Dow Jones Industrial Average gained 0.9% to close at 16,512 while the S&P 500 Index rose 1% to close at 1,881. The Nasdaq Composite Index increased 1.2% to close at 4,123.

This Week

The Federal Reserve will be in the news again this week as Fed Chair Janet Yellen speaks before Congress’ Joint Economic Committee on the outlook for the U.S. economy. Expectations are for more of the same as the Fed winds down its stimulus program and adjusts monetary policy based on future economic data.

In overseas news, the European Central Bank (ECB) is scheduled to make an interest rate announcement and the Bank of England will hold a monetary policy meeting and announce its interest rate decision. Both are expected to continue their accommodative and easy monetary policies as their respective economies slowly recover.

Among the more prominent companies due to report quarterly earnings this week are Sysco and Walt Disney in the consumer sector, American International Group and Allstate in the finance sector, Devon Energy and Occidental Petroleum in the energy sector and Pfizer in the health care sector.

Portfolio Strategy

At the beginning of the year, the consensus among so-called investment experts was that the stock market would continue its climb as the economy became stronger and that bond prices would fall and yields would rise as interest rates moved higher in lockstep with an improving economy. Four months into the year, the yield on the 10-year Treasury has fallen to 2.58%, down from a level of 3% at the end of the year. The stock market as measured by the S&P 500 Index has risen only 1.9% through the end of April, which is the smallest change (up or down) in the index in this period since 2004. Obviously, investors are not totally convinced that the sputtering economy will shake off the winter blues and begin to accelerate with stronger GDP growth. Friday’s employment report was positive proof as a seemingly strong jobs report was greeted by weakness in stocks and lower Treasury yields. Under normal circumstances, just the opposite price action would happen in both the stock and bond markets. But with more ominous news coming from Ukraine and investors digging deeper into economic data and remaining skeptical about what they see, the market could be in a holding pattern for the time being.