Stock prices were little changed (Dow, ‑0.01%) to slightly lower (S&P 500, ‑0.1%) to moderately lower (Nasdaq, ‑0.5%) on Wednesday, with stock volatility rising and a risk-off move to Treasury bonds prompted by events in the Middle East and a well-received Treasury auction. Consistent with the risk-off theme, defensive stocks in the S&P 500 were generally positive for the day – utilities, +1.1%; consumer staples, +0.5%; health care, +0.2% – while technology (‑0.6%), energy (‑0.6%) and materials (‑1.5%) had declines. Crude oil futures prices declined slightly today, but copper’s price dropped another 13 cents or 3%, nearly matching Monday’s 3.5% decline. From its high, copper has shed roughly 10%, a sign that the global economy may not be as robust as other indicators have been suggesting – or that traders are anticipating higher energy prices to begin sapping the economy’s strength.
Thanks to a better-than-expected auction of $21 billion in 10-year T-notes, which trumped a report that Pimco’s Total Return bond fund sold all of its government bond holdings, Treasury bond prices rallied today. The 10-year Treasury gained nearly two-thirds of a point today, and the long bond was up almost a full point in price. After three weeks of rising inflation expectations, TIPS breakeven inflation rates pulled back Wednesday and TIPS securities lagged nominal Treasurys of equivalent maturity, although both TIPS and straight Treasurys finished higher in price. Bond returns are slightly in the black for the week, while stock market indexes – other than the Dow, which is ahead 0.4% – have experienced losses so far this week.
INVESTMENT OUTLOOK…For the moment, corporate earnings prospects remain positive, which is providing support to stock prices and offsetting the perceived increase in risk of either rising inflation or economic slowdown. P/E multiples, while relatively modest, may be vulnerable to downward pressures should Libyan unrest spread to other, more important oil producers, in which case the great profits expansion of 2010-11 may come to an end. It is not saying much to venture a guess that stock prices may be in for some short-term selling pressures. At this point, we would be inclined to view a moderate correction in stock prices as a buying opportunity, especially if events in the Middle East begin to go in the more benign direction of Tunisia/Egypt/Bahrain rather than that of Libya.
Copyright © 2011 by Wright Investors’ Service, Inc.