Stock prices fell broadly as Moody’s lowered its sovereign debt rating for Spain, jobless claims were reported to have bounced higher than expected last week, Middle East turmoil showed signs of spreading to Saudi Arabia, and commodities prices were uniformly lower. The S&P 500 and Dow were off 1.9% on the day, the second worst day for the S&P 500 since August, behind the 2.1% February 22 decline on the outbreak of violence in Libya. Libyan fighting is still in the news, indeed, pro-Gadhafi forces appear to have stepped up their attacks on rebel forces. In Saudi Arabia, one day ahead of the “day of rage” called for on Facebook, Saudi police fired rubber bullets on a small group of Shiite protesters. Saudi rulers have a tight grip on the populace, but the possible ramifications of unrest in the Middle East’s largest oil producer could be huge.
Still, crude oil prices were roughly $2 a barrel lower Thursday, experiencing only a partial rebound after the Saudi news hit the wire. Eighteen of the 19 commodities in the CRB commodities price index declined in price today, the exception being soybeans. As has been the case for at least the past few days, materials stocks and energy stocks were among the S&P 500’s weakest sectors today, losing 2.2% and 3.6%, respectively. We don’t put much weight on the 21,000 jump in initial jobless claims in the latest week; the prior week’s level of claims was the lowest in two and a half years, and the latest week’s tally was still below the 400,000 level. The trade report for January showed a merchandise trade deficit of $46 billion, $5 billion greater than the Street expected, which may mean a somewhat smaller GDP growth rate for the first quarter, although we still think a 3% growth quarter is likely.
Treasury bond prices rallied strongly Thursday on the weakness in global stock prices. The 10-year Treasury gained almost a point, the long Treasury climbed one and two-thirds point, as yields on both maturities fell more than 10 basis points on the day. TIPS securities also rallied strongly, although for a second straight day, breakeven inflation rates fell. Along with the decline in commodities prices, this latest decline in inflation expectations suggests that economic concerns are beginning to resurface, after months of quickening economic indications. The dollar rallied today on the increased market volatility, while gold fell more than 1%.
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 should events in the Middle East go in the more benign direction of Tunisia/Egypt/Bahrain rather than that of Libya. After today’s drop, the S&P 500 is down 3.6% from last month’s two and 32-month market high. At December 31, Tobin’s Q Ratio, a measure of stock market values, was at its highest level since 2002, although well off the market bubble highs of 11 years ago.
Copyright © 2011 by Wright Investors’ Service, Inc.