Will high oil prices and stocks run a collision course?
A barrel of oil is now over $112 a barrel, and gas in our area is over $4 a gallon. Master card reported that gas purchases were down 5 weeks in a row. The higher prices now are already affecting consumer behavior and is acting as an overall ‘headwind’ for our economy. It seems for most analysts that something has to give; it’s either that oil prices moderate, or perhaps the stock market.
Fears of a government shutdown loomed large last Friday night. With less than an hour to spare, Congress pushed through a last-minute spending bill – the seventh in the past six months – which cut $2 billion and allows agencies to spend money through April 15. By that time, lawmakers expect to determine a budget for the remaining six months of the fiscal year. It is interesting to note how awareness of the potential shutdown affected investors.
As a result of the budget impasse, a sharply weaker dollar led investors into oil and commodities, while U.S. stocks fell. As we’ve mentioned before, equity markets don’t like uncertainty, and the exodus we saw on Friday is a classic example of this fact. At a time when concerns regarding the Middle East situation has sent oil prices surging, and the Japanese disaster has impacted supply chains, reaching a deal was extremely important. The last-minute agreement keeps 800,000 government workers on the job and a variety of services, from passport issuing to tax collecting, up and running. It also allows the military to continue receiving their paychecks.
“Both sides had to make tough decisions and give ground on issues that were important to them,” President Obama said. “But beginning to live within our means is the only way to protect those investments that will help America compete for new jobs.” Despite budget concerns, consumer confidence rose for a second consecutive week as an improving job market helped ease the burden of higher fuel costs.
As in the past, both international and domestic politics will continue to play a part in peoples investing decisions. The week ahead will likely be no exception as the new budget is voted on. Also next week, a series of labor reports are released and earnings season begins. We’ll let you know how things turn out in our commentary next week.
ECONOMIC CALENDAR: Tuesday – International Trade, Import and Export Prices, Bank of Canada Announcement, Treasury Budget Wednesday – Retail Sales, Business Inventories, EIA Petroleum Status Report, Beige Book
Thursday – Producer Price Index, Jobless Claims Friday – Consumer Price Index, Empire State Mfg, Treasury International Capital, Industrial Production, Consumer Sentiment
Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized.
Sources: Yahoo! Finance, MSCI Barra. Past performance is no guarantee of future results.
Indices are unmanaged and cannot be invested into directly. NA means not available.
HEADLINES:
Crude oil advanced 2.3% Friday, settling at $112 a barrel – its highest price in more than 30 months. In addition to sparking fears about a slowdown in the global economy, investors are also concerned about Libya's civil war and the country’s 80% drop in production.
On April 6 Portugal asked for international assistance, joining Greece and Ireland in receiving bailouts from the European Union and the International Monetary Fund. The country faces around €4.3 billion ($6.2 billion) of bond redemptions in April, followed by a repayment of €4.9 billion in June.
The quarterly earnings season begins next week. Gas and commodity prices have surged this year, and could spell trouble for the rebound in consumer spending and sales growth. Overall, earnings for the companies in the S&P 500 are expected to be up 11.5% over last year. Revenues are expected to rise 8%, remaining unchanged from the fourth quarter.
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