The Gadhafi regime struck back with brutality against Libyan protesters, closing Libyan ports, sending world crude oil prices up roughly 6% and producing a wave of profit taking in stock markets around the globe. U.S. stock prices declined roughly 2% Tuesday, as higher oil prices spawned renewed worries about a double-dip recession. Today’s stock price declines effectively catch the U.S. market up with European markets, which sold off Monday while New York markets were closed for the President’s Day holiday. Treasury bonds longer than 10 years to maturity rallied by more than one point as a bit more fear was injected into markets. The VIX stock market volatility measure climbed from 16% to 21% today, highest level since December 1.
Today’s stock market decline was roughly the same magnitude as the one-day plunge on January 28, when Hosni Mubarak disappointed people expecting his departure. Subsequently, Mubarak was compelled to resign by the hundreds of thousands of peaceful protesters who simply refused to accept his staying in power until September elections, a fact the Egyptian military apparently came to accept; stock prices resumed their upward march to new highs. In contrast, there seems little likelihood that Gadhafi will go as quietly and still a lot of uncertainty whether or not he will go at all. The $6 a barrel rise in crude oil prices today, while not enough to reverse the economic revival under way globally, could do so if it is the start of a sustained increase in prices. Saudi Arabian assurances that they will keep world oil markets amply supplied in the event Libyan production is shut in for an extended period provide fairly good reason to think the recession outcome will be avoided, although no one can say for certain that Saudi Arabia will remain totally immune to the wave of protest sweeping the Middle East. Ailing octogenarian King Abdullah is reported to be returning to Riyadh, after an extended stay outside Saudi Arabia.
Stocks may also have been ripe for a correction, given their steep rise since August. Today’s economic reports were mixed, with consumer confidence climbing to the highest level early on in the 2008-09 recession – the highest since 2006 for consumer expectations – but home prices falling for a fifth month in a row. After the close of trading, Hewlett-Packard reported disappointing sales in PCs and its technology services unit, according to the Wall Street Journal Online, and tech stock weakness may prevail at Wednesday’s open.
INVESTMENT OUTLOOK…The respectable year-end rally in stocks, fashioned out of improvement in leading economic indicators, has continued early in 2011, extending the S&P 500’s increase to more than 100% since the market bottomed in March 2009. In reaction to the outbreak of protest and violence in the Middle East, stock market volatility has returned to the 20+ level, as measured by VIX. For the moment, though, corporate earnings prospects remain positive, notwithstanding HP’s miss today, and unless Libyan unrest spills over to other, more important oil producers, we think the general trend of stock prices will continue to track with increasing profits. Of course, market rallies rarely continue in a straight line, particularly not after a doubling of stock prices, as we’ve seen over the past two years. At this juncture, we would view a moderate correction in stock prices as a buying opportunity.
Copyright © 2011 by Wright Investors’ Service, Inc.