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Two Year Run Leaves Investors up 95% - And Here Comes Oil

Posted by: Howard Silverblatt on March 4, 2011

Next week will mark the two-year anniversary of the bear market low on March 9, 2009. The quick 17-month 56.78% steep decline from the market high on October 9, 2007 (1565.15) to its low on March 9, 2009 (676.53) was the product of a liquidity crunch, a housing bubble with unsustainable prices, and unemployment, which resulted in a recession. The financial sector declined 82.62% during that period (more than Information Technology did in the Tech bust of 2000-2), as major institutions failed and major government assistance programs were implemented to prevent others companies from failing. From the market low, the index is up 95.28%, with 287 of the S&P 500 issues having doubled in price, and 405 having increased at least 50%. However, from the market high in 2007, the market remains 15.59% down, with 283 still trading lower than they were at back then (12 have doubled and 49 are up at least 50%). The market recovery started two years ago, as initial government supports took hold, and an economic balance between risk and reward met, albeit at a much lower level. Prices for products, housing and wages also realigned to the new economy. Corporate cost cutting (job reductions) has permitted companies to increase profits to the pre-recessionary level, with estimates now calling for new record levels of earnings in the second half of this year. It is this level of earnings which I believe supports the market at its current level, and permits it to trade through Middle East and US$ 100 oil prices. However, oil remains a major factor in earnings, and any escalation could jeopardize earnings, therefore pulling market support. At this point, the prospect of continuing improvement in the economy via higher employment outweighs the expected Q1 impact of higher oil, given the prevailing belief is that oil prices will not escalate. However, that belief is being tested as oil has now closed above US$ 104, a level not seen since September 2008, and the month that Lehman Brothers declared bankruptcy. Oils higher price has already been felt by consumers at the pumps, and by companies via materials (petroleum based products) and transportation costs. I would expect next week to see companies update their guidance and comment on the short-term (Q1) impact of oil, even if they are less specific about the longer-term oil level. I also expect to see Equity analysts adjusting their estimates, regardless of company guidance.
For issue and sector level data file and tables, click heresp500_20110304.doc

Reader Comments

Maple Insights

March 9, 2011 10:22 AM

History suggests a doubling of oil prices within a year can potentially lead to a recession. Based on where oil prices ended last year, that leads to prices in the range of $150-$160. That being said, prices where they currently stand, if they persist, can also cause a change in spending behavior, especially in the lower income brackets.

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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