Dollars and Sense: Markets simmer on reduced geopolitical heat

Mostly calm. Last week, the markets were down every single day. The Dow Jones industrial average dropped a total of 387 points, or 2.4 percent. But this week, things settled down a bit. Wednesday, for example, the Dow fell a little over 100 points, and then on Thursday, it was back up about 100 points, leaving it almost exactly where it had started the day before. The volatility index, which is supposed to measure fear in the markets, hovered around 15 for the week—not particularly high, despite all the troubles in the world.

Relief rally. This past week’s events in Crimea, though condemned by the U.S. and other Western powers, did not turn into the worst-case scenario, military action by Russia and street violence, so the markets calmed. On both Monday and Tuesday the markets were up. Some analysts called that a “relief rally,” meaning they thought geopolitical fears related to Ukraine were diminishing.

Yellen whispers. Just when geopolitical fears diminished, the new Federal Reserve chairwoman Janet Yellen said the Fed would dial back its bond-buying program another $10 billion. The move was expected, so most of the effect had already been baked into stock prices. But she also said interest rates might start going up in mid-2015. It appears that this comment, more than the reduction of the bond-buying program, spooked the markets on Wednesday and caused the drop I mentioned. Of course, by Thursday, everyone had taken a deep breath, and we saw the gain that left the markets where they started.

So all’s well that ends well? Out of curiosity, I looked at where the markets closed on Thursday compared to where they closed three months ago. Three months ago was just before Christmas, the end of a year that was one of the best years in the history of Wall Street. The markets have had a lot of ups and downs since then, but on Thursday the Dow closed within one point of where it closed 3 months earlier. There has been a lot of sound and fury, but so far, no reason to panic.

The week ahead. And I don’t see any reason to panic in the week ahead. This time of the month and quarter, the markets drift for a couple of weeks, waiting for next month’s unemployment number and the beginning of first quarter earnings season. More reports come out next week than this week. On a scale of zero to 10, with 10 being the most likely to have an impact on the markets, I would give all these reports a six or a seven. Tomorrow we’ll get consumer confidence and new home sales reports. On Wednesday, we’ll get February’s durable goods orders. Thursday, we’ll get the weekly unemployment claims number, as well as the final fourth quarter gross domestic product estimate. None of those reports are earth shattering, but if they all point in the same direction, especially if that’s negative direction, they could make a difference.