Oil will likely keep its stranglehold on the stock market as investors watch events play out in the Middle East in the week ahead.
Stocks seesawed in the past week, rising with good news on the U.S. economy and sinking when oil prices rose. The Dow finished the week up 39 points at 12,169, and the S&P 500 was up just 1 point at 1321. Oil gained another 6.7 percent to $104.42 per barrel, as gold climbed nearly $20 to $1428,.20 per ounce.
The dollar was lower on the week, with the dollar index down a percent. The euro was a winner on the promise of higher interest rates, and it settled at 1.3985, a gain of 1.7 percent.
Markets shrugged off Friday's positive February jobs report, which showed total non farm payrolls of 192,000, just about what economists expected. The unemployment rate fell to a surprise 8.9 percent, better than expected, but still the market moved in tandem with oil prices.
"Certainly the economy doesn't support prices this high...It looks like [they're] in for a long struggle in Libya. That would mean even more barrels will be taken off the market and that would continue the upward pressure."
Worth a note is the second anniversary Wednesday of the bear market low of March 9, 2009. The S&P 500 closed at 676 that day, 57 percent from its all-time high of 1565 in October, 2007. The S&P has since rebounded about 95 percent from that low.
"We're still in the denial stage and people haven't accepted it yet," said Richard Bernstein, CEO of Richard Bernstein Capital Management, noting many investors remain on the sidelines even as the stock market continues to rise. "There's been dramatic change in the economy" and the stock market has moved accordingly.
Standard and Poor's strategist Sam Stovall said he expects the market to make another move higher and sees the S&P at 1400 in the next year. However, he notes that in the third year of a bull market, the S&P has historically averaged just single digit gains. Typically, the leaders of the market switch as well, and large caps begin to lead small caps, he said.
Just as the economy is showing signs of job growth, the jump in oil prices has cast worry across markets that the economic recovery could be threatened if energy prices rise too much and for too long. Intensified fighting in Libya, continued unrest in Bahrainand concerns about protest spreading to Saudi Arabia all added to the price of oil in the past week.
"Certainly the economy doesn't support prices this high...It looks like [they're] in for a long struggle in Libya. That would mean even more barrels will be taken off the market and that would continue the upward pressure," said Michael Fitzpatrick, editor of Energy Overview news letter.
Stovall said the uncertain situation in the Middle East makes it difficult to read the outcome, and different cases can be made, including where the economy either continues with its "half-speed" recovery, or sees a delayed acceleration in recovery. The third scenario though is that oil spikes and hurts the economy, sending stocks into a bear market.
"That's the one thing that can definitely turn the economic picture around. It can undo the earnings growth story," he said.
Bernstein said the biggest concern would be if there was significant unrest in Saudi Arabia, the largest oil producer. "If things start heating up there, you'll have oil shock and the equities market will correct," he said.
What to Watch
In the coming week, there is a steady stream of economic reports, including trade data, weekly jobless claims, retail sales and consumer sentiment. The Treasury auctions $66 billion in 3- and 10-year notes and 30-year bonds.
The 10-year note ended the week with a yield of 3.490, as buyers moved into bonds in a safe haven play Friday.
"We have been watching the 3.57 10-year yield level as an important level...so with that as a backdrop we're looking primarily toward the auctions and will probably see a little bit of a back up higher in yield again...This is barring any global geopolitical events," said John Briggs, Treasury strategist at RBS.
"Later in the week, we're looking at trade to see if there's any impact on growth, and at retail sales at the end of the week to see if the consumer can gain any momentum," he said.
There is also key data from China. Forex.com's Brian Dolan said he is watching the trade balance on Thursday morning, and producer prices, industrial production, CPI and retail sales Friday.
"Chinese news has a pretty big impact lately on global markets. Also on Friday, we're looking for the Europeans to develop their competitiveness pact. This is where they're supposed to set ranges for debt reduction and deficits," he said. "There's still a lot of infighting. The more watered down the pact is the less credible it's going to be seen as."
The Bank of England also meets Thursday and it is not expected to move on rates or comment. European Central Bank President Jean Claude Trichet sent the euro higher this past week, when he said the ECB could raise rates in April, but he also said that is not certain.
Dolan said much of Trichet's suprise comments were already factored into the market. Traders had been speculating about a May rate hike. "We're only about 120 points higher on euro dollar since Trichet's comments," he said.
"While this Libyan thing pans out, I think he dollar grinds lower," he said. "..it's risk aversion with stocks being sold, Treasurys being bought and the yield falling. That also weighs on the dollar.. the best thing for the dollar would be if (Libyan leader Muammar) Gaddafi disappears."
U.S. data includes consumer credit Monday afternoon, and the NFIB small business survey Tuesday. Wholesale trade is reported Wednesday. Weekly jobless claims and international trade are reported Thursday, and retail sales, consumer sentiment and business inventories are released Friday.
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