Will higher oil prices derail the US economy?
By Ken Mahoney
As turmoil in the Middle East continues to roil the markets, it is no coincidence that "oil" is at the root of economic concerns. From an investment perspective, analyzing oil's relationship to the markets is crucial, but the reality is that nearly everyone (investors and non-investors alike) are affected by oil prices. So what exactly is affecting the rise in oil costs? And, more importantly, do oil prices have the potential to derail America's economic recovery?
After the fall of dictatorial governments in Tunisia and Egypt, unrest has spread throughout the Middle East, with Libya dominating the spotlight this week. The International Energy Agency reported late Friday that Libya is probably producing about 850,000 barrels of oil daily, down from its normal capacity of 1.6 million barrels, which represents just under 2% of the world's oil supply. While the sudden oil shortage hits European refiners the hardest, oil fears still caused the stock market to suffer its first weekly loss in a month. For the week, the S&P 500 slid 1.7%; the Dow dropped 2.1%, and the Nasdaq fell 1.9%. Happily, fears were eased somewhat on Friday when Saudi Arabia reported it has increased its crude oil production to 9 million barrels a day to make up for supplies lost in Libya.
What we're seeing right now is a tug of war between worry and economic fundamentals. While most U.S. economic data looks good, investors are focused on the potential implications of interruptions in oil production. For the moment, this issue will dominate the headlines regardless of how attractive other data looks.
U.S. drivers have already been feeling the pinch at the pump, with gas prices spiking 6 cents on Friday, the biggest one-day jump in two years. The national average price for a gallon of regular gas rose to $3.29, according to AAA, marking the fourth day in a row that prices have risen and bringing the national average to the highest level since October 2008. In general, every $1 increase in the price of oil costs consumers $1 billion over the course of a year. Higher oil prices also weigh on the U.S. economy by increasing the costs of moving goods, thus transferring rising costs to manufacturers, wholesalers, retailers, and eventually the American public.
If gas prices continue to rise as some analysts predict, how will this affect the economic recovery? Put simply, there is no way to know for sure. Granted, when gas prices go up, Americans have less to spend on everything else. And since consumer spending makes up over 70% of the U.S. economy , a drop in spending could slow the recovery down. At the same time though, modest increases in fuel prices do not inevitably cause economic slowdowns. What they more often do is cause alarm, thus affecting consumers' perceptions about what they can afford and causing them to react by tightening their belts.
So while the natural reaction may be to retreat to conservative investments and cut-off all spending on nonessentials, it is important to avoid overreacting. The coming week promises to shed more light on the true status of our domestic economy as various data related to jobs, payrolls, and manufacturing are released.
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Mr. Mahoney is a registered broker with Aurora Capital LLC, registered broker-dealer with U.S. Securities and Exchange Commission, member FINRA/MSRB/SIPC. Clearing through Legent Clearing LLC, member FINRA/MSRB/SIPC.
*Stock investing involves market risk including loss of principal. The fast price swings of commodities will result in significant volatility in an investor's holdings. Government bonds and Treasury Bills are guaranteed by the US Government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.
Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq. The DJIA was invented by Charles Dow back in 1896.
The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indexes from Europe, Australia and Southeast Asia.
The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
Google Finance is the source for any reference to the performance of an index between two specific periods.
Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
Past performance does not guarantee future results.
You cannot invest directly in an index.
Consult your financial professional before making any investment decision.
Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors.
These are the views of Platinum Advisor Marketing Strategies, LLC, and not necessarily those of the named representative or named Broker dealer, and should not be construed as investment advice. Neither the named representative nor the named Broker dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.
Markets climb to 2 ½ year highs, what’s next? Ken Mahoney
Wall Street started last week holding its breath while waiting to see whether Hosni Mubarak would step down as Egypt’s president. Bowing to pro-democracy protests, Mubarak resigned on Friday, ending 30 years of authoritarian rule in the Middle East’s most populous country.
As fireworks burst over Cairo’s Tahrir Square, there was a collective sigh of relief on Wall Street, while the benchmark averages rose to finish Friday’s session with weekly gains. U.S. stocks climbed to fresh 2 1/2-year closing highs after the resignation of Mubarak removed a layer of uncertainty from global markets. The Dow had a weekly advance of 1.5%, while the S&P 500 rose 1.4% and the Nasdaq added 1.5%.
Analysts and investors agree that Mubarak’s resignation dramatically reduces geopolitical risk and uncertainty from the region.
Reflecting this, oil prices fell following the news in Egypt, with crude dropping to $85.16 a barrel in midday trading Friday. Other dollar-denominated commodities, including gold and silver, also drifted lower following Mubarak's resignation. Gold prices slid $5.30, settling at $1,357.20 an ounce.
On another topic, how does starting a new week on St. Valentine’s Day traditionally affect the markets? Interestingly, the “day of love” hasn’t customarily shown much “love” to investors; at least when using the S&P 500 index as a gauge. According to Howard Silverblatt, a senior index analyst at S&P Indices, going back to 1928, February 14 trading days only notched gains on the S&P 38.7% of the time against a historical daily rate of 52.03%. Here’s an interesting caveat though – in looking at the 11 Valentine’s Days that occurred on the first trading day of the week, the S&P 500 logged a gain 63.4% of the time. While we’re certainly not trying to make a prediction, it is interesting to see what history can teach us about market behaviors.
From war and peace one week, to love and chocolates the next, it just goes to show that almost any world event has potential to affect people’s investments. Like everything in life, weathering all the little ups and downs requires intelligence, patience, and a cool head.
ECONOMIC CALENDAR:
Tuesday – Retail Sales, Empire State Mfg. Survey, Import and Export Prices, Redbook, Treasury International Capital, Business Inventories, Housing Market Index Wednesday – Housing Starts, Producer Price Index, Industrial Production, EIA Petroleum Status Report, FOMC Minutes
Thursday – Consumer Price Index, Jobless Claims, Industrial Production, Leading Indicators, Philadelphia Fed Survey
Data as of 02/11/2011 1-Week YTD 1-Year 5-Year 10-Year
Standard & Poor's 500 1.39 5.69 23.2 0.98 0.11
Dow 1.50 6.01 20.9 2.48 1.38
NASDAQ 1.45 5.90 29.0 4.84 1.37
MSCI EAFE 0.07 4.48 17.6 1.71 N/A
10-year Treasury Note (Yield Only) 3.65 N/A 3.73 4.58 5.02
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:
Pandora Media Inc., filed papers Friday to raise as much as $100 million in an initial public offering of stock. Pandora offers an Internet service that creates playlists of songs based on user feedback. The Oakland, Calif.-based company said it now has more than 80 million registered users, and “a more than 50% share of all Internet radio listening time among the top 20 stations and networks in the United States.”
The euro fell to a three-week low against the dollar as speculation increased that Portugal will follow Ireland in tapping the European Financial Stability Facility. Yields on 10-year Portuguese debt climbed on Feb. 10 to 7.64 percent, the highest level since the introduction of the euro in 1999.
U.S. consumer sentiment rose to its highest level in eight months in early February, boosted by recent tax cuts and optimism about the economy. The preliminary February reading for the overall index on consumer sentiment came in at 75.1, up from 74.2 in January, the highest level since June 2010.
The Commerce Department says the deficit in December increased 5.9% to $40.6 billion. It grew because the 2.6% gain in imports outpaced the 1.8% rise in exports. For 2010, the U.S. trade deficit rose to $497.8 billion, a 32.8% surge and the biggest annual percentage gain since 2000.
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*Stock investing involves market risk including loss of principal. The fast price swings of commodities will result in significant volatility in an investor’s holdings. Government bonds and Treasury Bills are guaranteed by the US Government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.
Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq. The DJIA was invented by Charles Dow back in 1896.
The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indexes from Europe, Australia and Southeast Asia.
The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
Google Finance is the source for any reference to the performance of an index between two specific periods.
Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
Past performance does not guarantee future results.
You cannot invest directly in an index.
Consult your financial professional before making any investment decision.
Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors.
These are the views of Platinum Advisor Marketing Strategies, LLC, and not necessarily those of the named representative or named Broker dealer, and should not be construed as investment advice. Neither the named representative nor the named Broker dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.
Investor’s are more optimistic
In spite of ongoing turmoil in Egypt and the Middle East, the markets continued their gain last week. For the period ending February 4th, the Dow, the S&P 500, and the Nasdaq all climbed reflecting elevated optimism in the markets. The AAII Sentiment Survey for last week shows that 51.5% of investors are feeling bullish, up 9.5% from the week of January 24th. That’s well above the historical average of 39%.
Indeed, this optimism is even more remarkable in light of last week’s jobs report which has been subject to conflicting opinions and interpretations. Case in point: According to a MarketWatch headline from Friday, the “job crisis isn’t over”, while a cnnmoney.com headline from the same day touted that, “the job market is getting better.” Each headline could be considered accurate, but clearly they offer different slants. Though the rate of hiring did not show a notable increase, the unemployment rate still fell to 9.0% - bad news and good news at the same time. Some analysts predict that bad weather across the U.S. is partially to blame, with more than 850,000 workers prevented from working at the time the survey was conducted. Other explanations have also been cited, and as a result, it appears that many are waiting for February’s report for clarification before jumping to conclusions.
Recent events, both within the U.S. and internationally, illustrate a noteworthy aspect of investing: It is impossible to predict how the stock market will react to news. Such an optimistic week in light of Egyptian strife and a conflicting jobs report is a pleasant surprise. It seems that the market has had time to price in geopolitical risks in Egypt and sluggish jobs growth and found such factors to be no immediate threat. Clearly, the headlines and the stock market do not always move in tandem. This is a good fact to remember when evaluating how much credence should be given to sensational news reports.
ECONOMIC CALENDAR
Tuesday – Redbook
Wednesday – Bank Reserve Settlement, EIA Petroleum Status
Thursday – BOE Announcement, Jobless Claims, Wholesale Trades, Treasury Budget Friday – International Trade, Consumer Sentiment
Data as of 02/04/2011 1-Week YTD 1-Year 5-Year 10-Year
Standard & Poor's 500 2.71 4.23 23.3 0.74 -0.29
Dow 2.27 4.45 20.9 2.41 1.13
NASDAQ 3.07 4.39 30.3 4.48 0.41
MSCI EAFE 3.16 3.93 15.7 -0.41 1.56
10-year Treasury Note (Yield Only) 3.33 N/A 3.61 4.53 5.14
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:
The Green Bay Packers won its fourth Superbowl title in a 31-25 victory over the Pittsburgh Steelers. The Vince Lombardi Trophy is headed back to Titletown for the first time in 14 years.
Super Bowl-related consumer spending will reach $10.1 billion this year, the National Retail Federation says. The Washington-based trade group cites a survey conducted by its Retail Advertising and Marketing Association division that says the average consumer will spend $59.33 on game-related merchandise, apparel and snacks, up from $52.63 last year.
Hackers have repeatedly penetrated the computers running Nasdaq during the past year. Though the exchange’s trading platform was not violated and no information has been compromised, a federal investigation is underway.
Businesses’ unemployment-insurance payments rose 37% in 2010. Last year, the amount employers paid into state unemployment-insurance funds rose 34%. Combined with the increase in total wages, businesses paid out $43 billion.
On Friday, Bank of America appointed a new foreclosure and loan modifications czar, and created a new unit to oversee problem home loans. The new unit creates a seventh major division at the bank and will be overseen by Terry Laughlin. The move splits the largest U.S. bank by assets’ mortgage business: one focused on new and current mortgages, and another dedicated to foreclosures.
Share the Wealth of Knowledge!
Please share this market update with family, friends, or colleagues. If you would like us to add them to our list, simply click on the "Forward email" link below. We love being introduced!
*Stock investing involves market risk including loss of principal. The fast price swings of commodities will result in significant volatility in an investor’s holdings. Government bonds and Treasury Bills are guaranteed by the US Government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.
Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq. The DJIA was invented by Charles Dow back in 1896.
The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indexes from Europe, Australia and Southeast Asia.
The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
Google Finance is the source for any reference to the performance of an index between two specific periods.
Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
Past performance does not guarantee future results.
You cannot invest directly in an index.
Consult your financial professional before making any investment decision.
Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors.
These are the views of Platinum Advisor Marketing Strategies, LLC, and not necessarily those of the named representative or named Broker dealer, and should not be construed as investment advice. Neither the named representative nor the named Broker dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.