Anxiety on the Rise
March 18, 2014
Chief Investment Officer
City National Rochdale
Global equity markets are struggling so far in 2014 as investors
grapple with three disturbing trends: 1) Russia’s military
occupation in Crimea; 2) decelerating growth in China; and
3) persistent concerns about the strength of the U.S. economic
expansion. With investors anxious to protect last year’s stock
market profi ts, how signifi cant are these developments?
Th e S&P 500 fell 2.0% last week, wiping out the strong
February gains and leaving the broad stock market index at
approximately fl at for the year. With political and economic
unrest accelerating in so many parts of the world (think
Ukraine, Argentina, Venezuela, Iran, Syria, Th ailand, and
the China/Japan dispute, to name a few), it is no wonder that
anxiety is on the rise. In a risky world, investors typically head
for the safe haven of U.S. Treasury bonds, and last week was no
diff erent. Th e 10-Year U.S. Treasury note fell 15 basis points,
dropping its yield to 2.65%.
The most likely outcome of the crisis in Ukraine is a negotiated
settlement between Russia, Ukraine, the United States, and the
European Union that addresses the dispute over Crimea and
resolves a number of other outstanding points of contention.
Unless Russia ups the ante by forcing a military confrontation
in Eastern Ukraine or fomenting a Ukrainian civil war, they
are likely to face only modest economic sanctions from Europe
and the U.S., despite all the tough talk from Western leaders.
It is important to remember that the imposition of tougher
economic sanctions on Russia will likely incite their own retaliatory
measures. Th is could include an embargo on gas exports
to European countries that are entirely dependent on Russian
gas for their energy needs. Such an escalation would have very
damaging eff ects on the entire global economy, and therefore
we believe (and hope) that the risks are perceived by both sides
as being too great. However, given President Putin’s unpredictable
behavior so far, the probability is likely greater than zero.
Recent economic data out of China has been disappointing,
including weak manufacturing activity, a sharp decline
in exports, and concerns about too much debt and excess
capacity. Th e MSCI China Index has fallen about 8.5%
this year as a result. At the same time, Chinese infl ation is
slowing sharply (only 2.0%), providing ample room for
Chinese authorities to stimulate economic growth through
more aggressive monetary policy. Our view is that China’s
growth will moderate, but the fears of a “hard landing” in
China are overblown. Importantly, China’s gradual transition
to a more consumer-led economy is creating pockets
of opportunity despite the deceleration in overall growth.
Finally, the nasty weather experienced by most parts of the
United States over the last several months has muddled the
economic picture. Economists have debated the precise impact
of the weather, but it may take several more weeks to gauge
its real impact. However, the solid growth in jobs reported in
February was the fi rst indication that the weather did understate
the true health of the economy. We continue to look for
signs of economic acceleration as we move into the spring and
Individual investors are often swayed by the hyperbole of
today’s 24-hour news cycle. While we do not discount the
dangers inherent in the world today, oftentimes it is this
anxiety which creates investment opportunity.
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presentation is not an offer to buy or sell, or a solicitation of
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City National Rochdale, LLC, a Registered Investment Advisor
and a wholly-owned subsidiary of City National Bank.