Geopolitical events tend to involve a high degree of uncertainty. A geopolitical event involving Vladimir Putin involves a massive degree of uncertainty. Russia/Ukraine developments Monday contributed to a volatile session on Wall Street. From Bloomberg:
The Obama administration today imposed sanctions on seven Russian officials and 17 companies linked to President Vladimir Putin's inner circle over the crisis in Ukraine. The U.S. and EU say Russia hasn't lived up to an accord signed April 17 in Geneva intended to defuse the confrontation between the Ukrainian government and pro-Russian separatists. The U.S. warned it's prepared to levy additional penalties to hit the broader Russian economy if Putin escalates by sending troops into Ukraine.
Uncertainty Short And Longer-Term
Monday's session was a condensed version of the lingering indecisiveness that continues to dominate the battle between bulls and bears.
This week's video takes the same concepts to an intermediate-term time frame. The evidence in hand continues to call for tighter than normal risk management controls.
Bank Of America Adds Fuel To Uncertainty Fire
Give the economy's heavy reliance on credit, a lagging financial sector is not what a stock market bull wants to see. Bank of America (BAC) did not do the sector any favors Monday. BAC dropped over 6%. From The Wall Street Journal:
Bank of America's Corp.'s about-face on its capital plans has prompted analysts to cast a skeptical eye toward the stock price over the short-term. The Charlotte, N.C. bank announced Monday that it suspended its stock buyback and plans for a dividend increase after discovering a mathematical error when determining some key capital levels. Bank of America said the Federal Reserve asked officials to put its capital plan on hold after the mistake was discovered.
Correction or Bear Market
We all know at some point stocks will take more than a mild rest. A logical question is will the rest take the form of a correction or a bear market. An RBC market strategist recently made a relevant point regarding that question. From Marketwatch:
Jonathan Golub, chief U.S. market strategist at RBC Capital Markets, wants you to consider this: "rallies do not end when they get tired, they end when recessions ensue." In a Monday note to clients, he writes that seven of the last eight bull markets ended at the onset of a recession.
We are not big fans of forecasting, but if we had to guess, the answer is correction rather than bear. The economy and longer-term technical picture both look too healthy to respond with a bear answer. However, we noted on April 11, corrections can feel like mini bear markets.
Investment Implications
On April 24 we pointed out the value of establishing guideposts when investors begin to question the attractiveness of equities. The Dow has yet to clear the December 29 guidepost below, which reinforces the need for patience and flexibility.
The big picture profile continues to align with a diversified mix of stocks (SPY) and bonds (TLT). We will be looking for a combination of economic data, geopolitical developments, and technicals that point toward a more definitive resolution, either up or down.
