Vladimir Putin likes to say that there’s nothing
exceptional about the United States. And last week it was hard to argue with
him, at least when it comes to the stock market.

U.S. markets finally succumbed to the malaise
affecting the rest of the world, as the Dow tumbled for five straight days and
the S&P slipped into the red for the year.

Putin, of
course, is largely to blame. Russian troops have massed at the border of
Ukraine, and Crimean residents are set to vote on Sunday about whether to
secede. From there, the region would likely join Mother Russia. European and
American diplomats have threatened sanctions.

“The markets are hostage to diplomacy, and
diplomacy is not working right now,” says Joseph Quinlan, chief market
strategist for U.S. Trust. “There was no breakthrough between the U.S. and
Russia going into the weekend.”

Other factors sapped investors’ enthusiasm. China’s
exports, factory production, and retail sales were weaker than expected.
European industrial production and a reading of consumer confidence in the U.S.
also proved disappointing.

For the week, the Dow Jones Industrial Average
dropped 2.4%, or 387.05 points, to 16,065.67. The Standard & Poor’s 500
index fell 36.91 points, to 1841.13. The Nasdaq Composite index slipped 2.1%,
or 90.83 points, to 4245.40.

Fears of a trade-sapping Cold War with Russia may be
the biggest factor holding stocks at bay for now. But even if the conflict
dissipates, the U.S. economy and corporate performance are doing little to
light a fire under the market. Analysts’ earnings-growth forecasts for the
first quarter have fallen below 1%, down from almost 5% at the start of the
year. For the full year, earnings are now set to grow 7.7%, compared with
expectations of more than 11% in October, according to S&P Capital IQ.

“Stocks are not overvalued, but they need
validation from the economy,” says Mark Luschini, chief investment
strategist at Janney Capital Management.

That sets up
poorly for the coming week. The Fed will meet on Tuesday and Wednesday and
could decide to change the way it communicates its intentions to the market. So
far, the Federal Open Market Committee has used a “quantitative”
benchmark to determine when to raise interest rates, saying it will begin
considering a raise only after the unemployment rate has fallen below 6.5% and
expected inflation remains below 2.5%. But unemployment is now at 6.7%, and
some Fed officials have begun discussing offering more “qualitative”
guidance not connected to specific numbers. There’s clearly a risk in doing
that—the Bank of England attempted to offer more qualitative guidance last
month and was “somewhat ridiculed” for offering an unclear forecast,
Luschini says. This will be Janet Yellen’s first meeting at the helm, and it
looks like it won’t be easy. (Barrons Online).