Two trading sessions after their best one-day increase of the year, stock prices declined for a second straight day on Monday, with the S&P 500 losing 0.8% and Nasdaq down 1.4%. Technology stocks remain the weak sister in the current market, although materials and other cyclical sectors have also been under some pressure lately. Semiconductor stocks were hurt today by a move to a less bullish stance on the group by analysts at Wells Fargo. Prices of copper futures for May delivery dropped roughly 3.5% on the day, an indication of concerns that high oil prices will crimp the global economic expansion enough to stanch demand for the red metal.
For stock prices, this week marks 24 months off the bottom of the great 2007-09 bear market. As the table below shows, the S&P 500 is now almost 100% higher than it was at the market bottom, one of the steepest two-year price rises since the 1930s. The table also shows that, at 24 months, stock prices have recovered just 71% of the ground lost in the recent bear market, as compared with the more than 100% recapture that the average bull market has achieved within 24 months. So, as steep as the 2009-11 market rally has been, there appears to be more room for appreciation in today’s stock prices, provided the economic expansion can stay on track and the rise in inflation can be contained.
In the two weeks since the stock market reached its high, investors have been taking a break from the bullish mindset that prevailed during February. To be sure, the escalation of oil prices has introduced a higher degree of uncertainty in the outlook for GDP, profits and inflation. To blame all of this uncertainty on a madman – and no we’re not talking about Charlie Sheen – may be giving the man formerly known as “Libyan strongman” too much credit. But clearly the significant economic momentum with which 2010 began is unlikely to be maintained if all people can think about are higher gasoline prices and Gadhafi (with the occasional distraction of Charlie Sheen). But to the extent that speculation and fear are pushing energy prices higher – and not the fundamentals of supply and demand, which suggest somewhat lower prices – it is good to see that prices can also go south, as gasoline and heating oil contracts did this afternoon. Still, so long as uncertainties remain in Libya and elsewhere in the Middle East, stock and to a lesser extent bond market volatility is likely to remain elevated.
INVESTMENT OUTLOOK…For the moment, corporate earnings prospects remain positive, which is providing the majority of support to stock prices. On top of the risk that inflation goes higher and puts downward pressure on P/E multiples, there is also the risk that Libyan unrest might spill over to other, more important oil producers, in which case the profits expansion may get sidetracked. Either way, stock prices may be in for some short-term selling pressures. 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 in the more benign direction of Tunisia/Egypt/Bahrain rather than that of Libya.
Copyright © 2011 by Wright Investors’ Service, Inc.