As the most volatile week in months winds down, investors are more likely to quietly square positions Friday, ahead of the weekend and month end.
Some of this week's ramped-up fear trade subsided Thursday, as oil declined, after an $8 swing, and stocks finished just slightly lower. The Dow Thursday was down 37 points, or 0.3 percent to 12,068. The S&P 500 was down 1 point to 1306, still above the psychological 1300 level even though it crossed beneath the mark two days in a row.
The Nasdaq was a winner, as tech found some buyers after the near 4 percent Nasdaq decline Tuesday and Wednesday. It was up 14 points Thursday, or 0.6 percent to 2737. The VIX, the CBOE's volatility index, fell more than 3.6 percent to 21.32, after rising more than 30 percent in the previous two sessions. The worst performing industry sector was energy, which declined 1.4 percent after two days of gains.
Crude oil was lower on the day, following a wild session marked by rumors about Libyan leader Muammar Gaddafi. Oil was down $0.82 to $97.28, but not before rising to more than $103 overnight and then dipping after hours to the $95 range.
The dollar was weaker, as the euro gained 0.4 percent to 1.3802, and buyers flocked to the safety of the Swiss franc and the Japanese yen. The Treasury market continued to monitor the course of the stock market, and buyers drove prices higher as stock market volatility continued. The 10-year yield slid to 3.442 percent.
Friday's markets are watching the 8:30 a.m. release of the second revision to fourth quarter GDP, as well as the 9:55 a.m. University of Michigan consumer sentiment report.
There is also a Fed Monetary Policy Forum in New York. Richmond Fed President Jeffrey Lacker, Fed Vice Chair Janet Yellen and former Fed Vice Chairman Donald Kohn will be there. Investors will be watching the outspoken and hawkish Lacker for dissenting comments on the Fed's quantitative easing program, after both St. Louis Fed President James Bullard and Philadelphia Fed President Charles Plosser questioned it in the past two days.
There are also a few major companies reporting earnings, including JC Penney , Tenet Healthcare , Rowan Cos , and Interpublic .
While stock traders watch rising crude with a fearful eye, the talk on the street turned to concern about the duration of the move and how high it might go. The degree of uncertainty about the outcome in Libya and where else unrest could spread makes the situation especially difficult.
Northern Trust's chief investment strategist Jim McDonald released a report Thursday on his assessment of the potential impact on global equities markets from the unrest across the Middle East and North Africa.
His conclusion was that the situation is too fluid to forecast so investors should make investments that would benefit from continued turmoil while at the same time not significantly paring risk exposure. McDonald recently trimmed an overweight in emerging markets, as other managers have, and has shifted to an allocation in large cap U.S. stocks. He overweighted energy shares as both a play on global growth and a hedge against political risk. Northern Trust strategists also have a significant tactical overweight in gold as a hedge against both geopolitical and sovereign credit risk.
The big concern is that rising oil will tip the economy back into recession, but economists have stressed oil would have to stay high for some time in order to make a big impact.
President Barack Obama and Treasury Secretary Timothy Geithner tried to calm fears about rising oil Thursday. Obama told a gathering of corporate executives that he believes "we'll be able to ride out the Libya situation and it will stabilize."
Goldman Sachs economists, in a note, said rising oil could impact GDP. They said higher oil lowers personal consumption, reduces business investment and inventory accumulation.
The Goldman economists projected that a 10 percent increase in crude, if it persists, would result in a reduction in GDP of about 0.2 percentage points in each of the following two years. For each 10 percent increase in oil, retail gasoline prices rise by about 6 percent, which would result in about a 0.3 percent hit to household real income, they estimated.
Based on their calculation, the hit then to real consumer spending would be about 15 basis points over one year. In GDP terms, consumer spending would result in about a one tenth of a percentage point reduction.
The economists said their forecast for oil prices is already at $120 for 2012, a fairly significant increase in crude. They also caution that their estimates are a rough guideline for the impact on GDP and may underestimate the economy's vulnerability if there is a major oil shock.
- Follow me on Twitter @pattidomm.
Questions? Comments? Email us at firstname.lastname@example.org