Escalating political unrest in Libya proved to be the tipping point last week for a U.S. stock market that might have been looking for an excuse to pull back from an extended rally.
Escalating political unrest in Libya proved to be the tipping point last week for a U.S. stock market that might have been looking for an excuse to pull back from an extended rally.
At the same time, some market watchers already are sensing a short-term buying opportunity, which helps explain the market's rebound Friday.
“What we saw in the markets over the past few days was the result of performance anxiety,” said Matt Lloyd, chief investment strategist at Advisors Asset Management Inc.
“The stock market has had a great run-up, and investors were looking for reasons to sell,” he added. “People do not want to chase bubbles anymore.”
Libya, which erupted into civil war last week, is the fifth North African or Middle Eastern country to see massive political uprisings challenging autocratic rule since Tunisians overthrew their government in January.
Before the unrest in Libya, which produces 1.8 million barrels of oil per day, U.S. financial markets essentially had been shrugging off the unrest. But when oil spiked last week above $100 a barrel for the first time since October 2008, investors saw a signal to start selling stocks.
The S&P 500, which gained more than 90% from its March 2009 low point, declined 2.7% over the first four days of last week.
“There had been a lot of bullishness out there, and when you get a lot of investors moving to one side of the trade, it makes the market vulnerable,” said Brian Gendreau, a market strategist at Financial Network Investment Corp. and a professor of finance at the University of Florida.
“This is a classic flight to quality,” he added. “I don't know that a reversion to pre-disruption levels will be so quick.”
In addition to the cumulative effects of the protests, there are also the effects related to where they have erupted: Tunisia, Egypt, Yemen, Bahrain, Libya and Iran.
“When it comes to the global economic and financial aspects, Bahrain and Libya differ from Egypt and Tunisia,” said Mohamed El-Erian, chief executive and co-chief investment officer of Pacific Investment Management Co. LLC.
“Libya is a significant oil exporter ... Bahrain has become a battleground for sectarian issues,” he said. “The dynamics of the protests changed as relatively peaceful movements in Egypt and Tunisia regrettably gave way to violence elsewhere. This increases the uncertainty of both the current period and the post-transformational period.”
The stock market's reaction over the past week is seen by some investors as an anticipation of more bad news to come, according to Quincy Krosby, a market strategist at Prudential Financial Inc.
Aside from higher gas prices, she said, “the crisis in the Middle East is not directly affecting us right now, but it's seen as a future crisis.”
“The U.S. market is afraid that oil prices could continue to rise, and anything related to oil is going to be a key reason for a market pullback,” Ms. Krosby said. “But once those fears are alleviated, you will see the market calm down.”
To that end, Saudi Arabia, the world's largest oil producer, is considered key to heading off both the upward direction of oil prices and the unrest in the Middle East.
“The Saudis are trying to placate the oil-consuming countries by increasing production of the same kind of light, sweet crude that has been disrupted by the unrest in Libya,” Ms. Krosby said.
In addition to trying to fill the production gap, Saudi Arabia also is introducing a range of benefits for its citizens in order to keep them from taking to the streets.
“Over the next five years, we expect to see demand for oil increase because it is no longer just about U.S. demand,” Ms. Krosby said. “The market does not like shock, and the Saudis are trying to absorb the shock.”
As some investors have panicked and sold in response to the latest developments in the Middle East, others are looking for the next leg up for the stocks.
“There was a reasonable degree of complacency in the market over the past few weeks, and this [Middle East unrest] provided an opportunity for investors to take some chips off the table,” said Peter Tuz, president of Chase Investment Counsel Corp.
Even with the recent downturn, the S&P 500 still is up nearly 4% from the start of the year, which suggests to Mr. Tuz that the pullback wasn't as extreme as it could have been.
“You still have quite a bit of money on the sidelines on corporate balance sheets and in money market funds, and that's why I think the pullback might be muted,” he said. “And I think the market could handle oil at $100 a barrel.”
One thing that is not in doubt is the reality of rising commodities prices and the impact that is having on fueling many of the uprisings, according to Kevin Mahn, chief investment officer Hennion & Walsh Asset Management Inc.
“The baton of democracy is passing, and food inflation is at the core of this,” he said. “Those people are young, unemployed and starving.”
For that reason, he added, commodity-based investments are “attractive.”
“Everybody was talking about gold being overvalued, but that's where everybody went for safety,” Mr. Mahn said.
According to Mr. Lloyd, a stock market decline of another 3% “would be completely healthy.”
“We're long-term bullish, and while the summer might be flat, we still see high market returns this year,” he said. “Any pullback of this magnitude should be seen as a buying opportunity, because you're buying anxiety.”
E-mail Jeff Benjamin at jbenjamin@investmentnews.com.
