Last Quarter Round-Up   

Last quarter, I suggested the stock market could go in either direction in Q1-2014.  I saw no major catalysts for significant market movement.  The S&P 500 ended the quarter up slightly at +1.3% while the bond market was up a bit more at +1.8%.  It was, essentially, a flat market that didn't go in either direction.  The U.S. did outperform other world regions with International and Emerging market returns of +0.2% and -1.9% respectively for the quarter.

The first quarter was quiet in the U.S. starting with a surprisingly easy passage of the debt-ceiling increase in February.  The Affordable Care Act (a.k.a. ObamaCare) carried on with baggage from its troubled rollout, but with new adjustments and improvements as well.  Truly objective views on the program are hard to find.  It seems there is plenty to like and dislike depending on your personal ideology.  February also saw the running of the 2014 Olympic Winter Games, an imperfect, but generally impressive display from Russia.  Then, shortly after the conclusion of those Games, we watched Russia in another display...a military engagement for geopolitical purposes.  As Ukraine overturned its pro-Russian government and replaced it with a more pro-western regime, Russia responded with troops dispatched to the more ethnic-Russian eastern Ukrainian border and unidentified troops invading the southern Ukrainian peninsula of Crimea.  Crimea was rather quickly annexed from Ukraine to become a Federation of Russia.  Crimean citizens are predominantly ethnic-Russian and supported the annexation overwhelmingly.  World leaders barked at Russian President Vladimir Putin with little effect.

Current Quarter Outlook 

For the coming quarter, I again don't see significant market drivers in the U.S.  The Ukrainian situation is the most substantial current event and it is getting clearer that it is the U.S. vs. Russia.  I believe Russia is pushing as many buttons as they can to allow a diplomatic solution that offers them complete control and re-supply capabilities for their Crimean naval port and Black Sea fleet.  Understand that Crimea is only technically a peninsula with a thin land bridge preventing it from being an island.  That land bridge is critical to Russian re-supply capacity.  Their seemingly aggressive actions give them room to compromise if they can secure a land access deal.  However, logic doesn't always overcome when dealing with strong convictions and egos.  The Ukrainian situation is dangerous and could devolve into something much uglier.  It is not my base prediction, but it cannot be completely ruled out.

Markets tend to adjust in one of two ways, the first being the abrupt, downward correction most of us dread.  The second is a tendency to float around a given level for an extended period with only minor ups and downs.  The first quarter was more of the second option, and that is generally how I feel about the second quarter.  With the positive, albeit shrinking bias from the Federal Reserve combined with a generally improving economy, the abrupt downward correction is possible, but doesn't seem likely for now.  My equity strategy is to remain fully invested being neutral on the U.S., adding to International positions and overweight Emerging Markets.  I will hold fixed income positions and continue to be overweight in alternative investments.