Stock prices rebounded nicely on Tuesday, with the S&P 500 gaining back a little more than it had lost on Monday. For a second day, stocks in the financial sector outdistanced the rest of the pack, with the S&P 500 financials adding 2.2%, compared with a 0.9% gain for the S&P 500 Composite and a 0.6% decline by Tuesday’s only declining group, energy stocks. Crude oil futures prices were lower by roughly $1 a barrel or 1%, with the day’s events in Libya and the Middle East generally not dramatic enough to sustain the momentum in oil prices. With stocks recovering a measure of their earlier strength, Treasury bond prices were moderately weaker today; the 10-year Treasury lost about one-quarter point on the day, its yield rising to 3.55%. Treasury Inflation Protected securities performed somewhat better than nominal Treasurys again today; the 10-year breakeven inflation rate rose to a two and a half year high of 2.57%.
A slow day on the economic front saw the ICSC-Goldman Sachs weekly same-store sales index rise 2.3% to its best level since December. As the chart below suggests, recent sales gains have moved the ICSC sales aggregate back close to the December high water mark. Of course, sales were close to these peak levels one year ago, so in that sense there is much ground to make up before one can consider sales truly back to normal. Then again, perhaps a period of somewhat subdued sales growth and elevated savings rates – a combination some might call the new normal – may actually be more beneficial to the nation’s economic health in the long run.
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.