Fears of nuclear disaster outran efforts to bring the Fukushima reactors under control, and the resulting meltdown of investor nerves took stock prices lower virtually the world over Tuesday. In Japan, where reactor explosions and overheating fuel rods have generated an enormous amount of anxiety and confusion, the Nikkei 225 stock price index declined 10.6% today, after a 6.2% drop on Monday and 1.7% on Friday, the day of the quake and tsunami. In Europe, the major stock market averages were down by 1% to 3% in a second day of brutal selling. And U.S. share prices ended Tuesday down 1.1% (S&P 500), but up almost 2% from the low for the day, which occurred right after trading opened. Commodities prices were broadly lower Tuesday, with crude oil futures prices declining upwards of 4%, while the price of gold toppled $29 an ounce to $1398. The Japanese yen continued to buck conventional wisdom, gaining about 1% vis a vis the dollar and closing near a high.
While the eyes of the world have been on the troubles in post-tsunami Japan, forces loyal to Moammar Gadhafi have made gains in their drive to put down the popular revolution in Libya, even as the government of Bahrain declared martial law and welcomed Saudi soldiers into the country while casting a wary eye at Iran across the Persian Gulf. This unfortunate turn of events failed to stop the declining trend in crude oil futures prices, which fell to the $98 a barrel range today. Energy stocks, which lately seem to inhabit the leader board one day and the loser board the next, were down a bit less than the S&P 500 Tuesday, shedding roughly 0.8% in value as compared with the 1.1% decline in the S&P 500 Composite. So much in the outlook for energy stocks hinges on the price of oil, which is showing an extreme degree of volatility in light of the events in Japan and Libya, which raise questions on both sides of the energy supply/demand equation. This elevated level of volatility figures to inject more uncertainty into the economic outlook, in our view, raising hurdles to consumer spending and business investment. While U.S. economic activity has a fair amount of momentum as we approach the second quarter, a measure of caution may be appropriate in assessing the outlook for growth and profits over the balance of 2011 and 2012.
These are certainly not the best of times for deciding the course of Federal Reserve monetary policy, and the Fed’s Open Market Committee meeting concluded today with basically no change in policy: QE2 stays on course to its $600 billion midyear target and short-term interest rates are expected to stay in the 0%-0.25% range for an extended period. The language of the FOMC’s post-meeting statement noted that the U.S. economy is on a firmer footing and that energy and commodity prices have risen, but the Fed is maintaining its view that unemployment is “too high” and underlying inflation “somewhat low.” The Fed expressed the view that the increased inflation pressures that consumers have experienced are “transitory” and that longer-term inflation expectations remain “stable.”
INVESTMENT OUTLOOK…The earthquake and tsunami in Japan, combined with Middle East unrest, have clouded the near-term prospects for equities. Today, for late NYSE trading, the Fed’s apparently steady-as-she-goes monetary policy announcement seemed to have a calming influence on stock prices, although from point (2:15 E.D.T.) to point (4:00 E.D.T.), the effect was only about 35 basis points of positive thrust. The day’s net losses in equities redounded more or less to the benefit of the Treasury bond market, where the 10-year Treasury was up about half a point, trimming its yield to 3.30%, essentially the lowest level in three months. For the moment, corporate earnings prospects remain positive, which is providing some offset to the perceived increased risk of either rising inflation or economic slowdown. P/E multiples, while relatively modest on a forward basis, may be vulnerable to downward pressures should worse come to worst in Libya, threatening other, more important oil producers in the process. It is not saying much to venture a guess that stock prices may be in for some short-term selling pressures. At this point, based on our still positive view on corporate profits, we would be inclined to view a moderate correction in stock prices as a buying opportunity should events in the Middle East start to go in a more benign direction and nuclear disaster be avoided in Japan. After the Monday-Tuesday drop, the S&P 500 is down not quite 5% from last month’s 32-month stock market high and still up nearly 2% to date in 2011.
Copyright © 2011 by Wright Investors’ Service, Inc.