Except for Egypt and the “storm of the century,” today was a relatively quiet day, with little in the way of economic news and modest changes in the stock market averages. After Tuesday’s rush past the Dow 12000 and S&P 500 1300 milestones, in which the major market averages increased between 1% and 2%, Wednesday saw some selling pressures on signs that the protests in Egypt were taking on a more violent and chaotic tone. While the Dow was flat on the day, Nasdaq and the S&P 500 retreated 0.1% and 0.3%, respectively. ADP reported that its payroll surveys suggest that U.S. private sector employment increased 187,000 in January, nicely ahead of the 140,000 Wall Street estimate. Of course, with the prior month’s total being revised lower by 50k and given how much the ADP indicator overestimated the December jobs gains, not much significance is accorded to the ADP report and it appeared to figure little if at all in today’s market action.
Bad weather in the U.S. and Australia aggravated already tender sensibilities on the outlook for inflation. Sugar futures prices rose to the highest level in more than 30 years, rising 4% on the day, on fears that the super storm Cyclone Yasi in Australia will impede sugar production and shipments from the world’s third largest exporter. The U.S.’s own super storm helped push natural gas prices up nearly 2%, and wheat futures climbed more than 3%. This whiff of higher inflation sent the 10-year Treasury bond yield to 3.48%, its highest level of the year. The Egyptian turmoil seemed to be a factor in the dollar’s modest rise against the yen and euro, which trimmed gold and silver futures prices a bit, the trends in which have to be considered at least a bit surprising and even anti-inflationary.
Taking a longer perspective, we note that this week marks the 40th anniversary of the birth of the Nasdaq Composite stock index. After flaming out in 2000-02, Nasdaq spent much of the past decade in decline relative to the “old economy” industrial stocks in the Dow Jones Industrial Average. Since hitting a relative low in December of 2008, though, Nasdaq has gradually built up some momentum compared with the Dow, pretty much coincident with the 2009-11 historic rally in stocks. As we noted here, “There is some basis in the earnings and sales growth of Apple and Intel for higher relative valuations for those stocks than for the more blue-collar stocks in the DJIA, such as IBM.” But should the situation in Egypt go bad, the risk-off trade would no doubt produce at least a temporary retreat in technology stocks and Nasdaq.
INVESTMENT OUTLOOK…The respectable year-end rally in stocks, fashioned out of improvement in leading economic indicators, continued early in 2011, extending the S&P 500’s total return to 100% since the market bottomed in March 2009. In reaction to the outbreak of protest and violence in Egypt, following on the same trends in Tunisia, stock market volatility, as measured by VIX, climbed back above 20% last Friday, the first time VIX has been that high in two months. To be sure, stock market volatility has since come down and in any case is still well off the awful levels of 2008-09. But, depending on the turn of events in Cairo, where Hosni Mubarak said Tuesday he will not run for re-election in the fall but protestors appear to want an earlier regime change, investors seem to be assuming for the moment that Egypt will not be the next “black swan.” We would not be surprised if the market’s flightiness of the past week is the first of the occasional bouts of volatility in 2011. For the moment, though, corporate earnings prospects remain positive, and if worse doesn’t come to worst in Egypt, the general trend of stock prices figures to be up.
Copyright © 2011 by Wright Investors’ Service, Inc.