Stock prices couldn’t sustain the rally that opened Wednesday trading and the S&P 500 closed lower by 0.6% on the day. The Dow (‑0.9%) and Nasdaq (‑1.2%) had bigger declines than the S&P 500, as did the S&P MidCaps (‑1.4%) and S&P SmallCaps (‑1.8%). With crude oil futures climbing 3% on top of yesterday’s 6% rise, only one sector of the stock market bucked Wednesday’s declining trend, and not surprisingly that was energy stocks (+1.9% for the S&P 500 energy sector). April crude oil contracts on the NYMEX brushed up against $100 a barrel for the first time since October 2008, shortly after the Lehman bankruptcy. As expected after its weak sales and earnings report Tuesday evening, Hewlett Packard shares were under pressure Wednesday; its near-10% decline, which made it the weakest constituent of the S&P 500 for the day, is reminiscent of Cisco’s fall earlier this month.
Consumers won’t get to enjoy the higher confidence registered in yesterday’s Conference Board report very long, given today’s 5% rise in gasoline prices. Prices were already on the ascent before the Libyan turmoil erupted. Stock market volatility notched up a bit for a second day on Wednesday, but today’s market action did not reflect a complete turn away from risk: the euro gained about two-thirds of a cent against the dollar and Treasury bonds shorter than 10 years to maturity sold lower late in the day. The 10-year T-note’s price fell six thirty-seconds and its yield edged up a couple of basis points to 3.48%. Treasurys may have suffered some as a result of comments by Federal Reserve Bank of Philadelphia’s President Charles Plosser – who is also a member of the FOMC – to the effect that the Fed should consider cutting short its QE2 Treasury buying program if the economic recovery continues to strengthen. Considering the new risks to the economy posed by Middle Eastern developments, this proposition seems to us a non-starter at this point.
Single-family existing home sales increased – on a seasonally adjusted basis – 2% in January to the highest level since last May. At the same time, the median price for an existing home sold last month fell to a nine-year low. As with yesterday’s Case-Shiller home price data, the tentative conclusion from today’s existing home sales report is that prices are still searching for a bottom.
INVESTMENT OUTLOOK…The respectable year-end rally in stocks, fashioned out of improvement in leading economic indicators, has continued early in 2011, extending the S&P 500’s increase to more than 100% since the market bottomed in March 2009. In reaction to the violent and chaotic turn of events in Libya, stock market volatility has returned to the 20+ level, as measured by VIX. For the moment, though, corporate earnings prospects remain positive, notwithstanding HP’s sales miss. Unless Libyan unrest spills over to other, more important oil producers, we think the general trend of stock prices will continue to track with increasing profits. Of course, market rallies rarely continue in a straight line, particularly not after a doubling of stock prices, as we’ve seen over the past two years. We would view a moderate correction in stock prices as natural at this juncture, and it may well be a buying opportunity should events in the Middle East go more in the direction of Tunisia/Egypt/Bahrain rather than Libya.
Copyright © 2011 by Wright Investors’ Service, Inc.