• Stocks experienced a sharp rebound following better-than-expected U.S. economic data.
  • Oil investors have been focused on the tensions in Ukraine.
  • Should events in Ukraine deteriorate, energy stocks are likely to perform better than the broad market.

Stocks Rebound Strongly on Positive Economic News

Stocks staged a sharp rebound last week with investors looking past growing tensions in eastern Ukraine and instead focusing on a barrage of better-than-expected U.S. economic data. For the holiday-shortened week, the Dow Jones Industrial Average surged 2.4%, the most since December, to close at 16,409. The S&P 500 Index recorded its best weekly percentage gain since July, advancing 2.7% to 1,865. The Nasdaq Composite, while down 6% from its 14-year high hit early last month, added 2.4% to finish the week at 4,096, its best performance since November.

The upbeat U.S. economic news pressured fixed income markets, with the yield on the benchmark 10-year Treasury rising to 2.72% (as Treasury prices correspondingly fell).  But while long-term rates drifted higher, dovish comments from Fed Chair Janet Yellen confirmed that the Fed is in no rush to raise short-term interest rates given downside risks to inflation. The Fed's preferred measure of inflation – personal consumption expenditures – has remained below the central bankers' goal of 2% for 22 straight months.

"Should events in Ukraine continue to deteriorate, energy stocks are likely to perform better than the broader market."

Biotech and Technology Remain Under Pressure

The sharp uptick for stocks came amid a jump in industrial production and a strong rebound in U.S. retail sales, which increased by 1.1% in March, their best showing in 18 months. Also helping stocks were solid earnings from several blue chip companies, including Johnson & Johnson, Intel, Coca Cola, Yahoo and Morgan Stanley.

While the broad averages posted their best performance in weeks, some segments of the equity market are still showing signs of stress. In particular, biotech indexes remain 16% off of their recent peaks. Meanwhile, technology sector darling Google saw its share price sink on disappointing earnings, with expenses surging and revenue coming in slightly below expectations. Finally, initial public offerings (IPOs) are also bearing the scars from the recent sell-off. Early in the week, cloud-based payroll software maker Paycom Software priced its IPO well below forecasted levels.

Oil Investors, Meanwhile, More Focused on Ukraine

By most fundamental measures, oil prices should be declining. In fact, the Energy Information Administration announced last week that oil inventories in the U.S. are approaching an all-time high. Furthermore, data showed the biggest one-week increase in stockpiles in 13 years, with inventories rising by 10 million barrels to 394.1 million, only 3.4 million below the all-time peak reached in May 2013. While strong U.S. production and rising inventories should keep a lid on prices, events outside the United States are putting upward pressure on oil.

First, production in several key Middle Eastern and North African producers — Libya, Nigeria and South Sudan — are well below potential, helping to limit global supplies. In addition, fears of escalating violence in eastern Ukraine and potential sanctions against Russia, the world's second-largest oil producer, are pushing prices higher. While equity investors may be ignoring events in Ukraine, oil traders are not, with oil prices hitting a six-week high.

Energy Stocks May Offer Some Protection

We are advocating an allocation to energy stocks, which have outperformed the broader market year-to-date. In addition to being one of the cheaper sectors and a good hedge should inflation eventually start to rise, the sector provides another important feature today: a potential hedge against rising geopolitical risk. Should events in Ukraine continue to deteriorate and lead to an escalating series of sanctions and higher oil prices, energy stocks are likely to perform better than the broader market.

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The go-anywhere BlackRock Global Allocation team offers insight into today's markets and discusses how they're navigating an uncertain world.

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