After wobbling early in the session, U.S. stock prices rallied Friday in the face of lower prices in Asia and Europe and the gradual appreciation of the scope of Japan’s big earthquake and tsunami. The S&P 500 rebounded 0.7% today, closing back above the round number 1300. Stocks were no doubt helped by this morning’s strong report on retail sales during February, which met or exceeded Street projections and were revised higher for January. The day’s gains trimmed the week’s decline in the stock market indexes by about one-third (S&P and Dow) to one-sixth (Nasdaq), leaving the averages 1% (Dow) to 2.5% (Nasdaq). Somewhat perversely, stocks in the energy sector were Friday’s leaders – despite another $2 a barrel or 2% decline in crude oil futures prices – reversing some of Thursday’s losses.
The U.S. dollar started strong today, but the Japanese yen rallied strongly during the day, and the euro gained on the greenback as well. Some speculated that repatriation of Japanese yen following the quake propelled the yen to its best increase against the dollar in three months. Similar reasoning may also explain the moderate weakness in the Treasury bond market Friday. For the week, however, the bond market outperformed stocks, with the Barclays U.S. bond market aggregate returning 0.4% as compared with a 1.2% loss by the S&P 500; the U.S. TIPS index was up about 0.6% for the week.
Today’s developments in Japan were dramatic enough to keep events in Libya off the front pages. The price of oil and refined petroleum products declined a percent or two this past week, but the increases of recent weeks have taken a toll on consumer sentiment. Friday saw the University of Michigan report that its consumer expectations index declined sharply in early March to its lowest level since March 2009 (coincident with the end of the great 2007-09 bear market. A good portion of February’s 1% jump in retail sales owed to higher gasoline prices; ex autos and gas station sales, core retail sales were up 0.6% last month but at just a 4.6% annual rate over the latest three months, down from 8.2% for the three months to November. Consumer spending may be somewhat constrained going forward to the extent that gasoline prices rise and confidence shrinks. As the chart below shows, due to continuing weakness in real estate values, household net worth has recouped only about half of its bear market losses, a fact that may make consumers more prone than usual to losses of confidence.
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 32-month market high.
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