The stock market's spectacular rally since August has powered past every potential obstacle. But now the bulls' path may be blocked by an old enemy: the gas pump.
Middle East revolt and the side effect of surging oil prices are threatening to finally give investors a reason to turn cautious, after share prices have spent nearly six months gliding up to multiyear highs.
According to Los Angles Times report published on 22nd February 2011.
By:-
Oil price surge may test stock market rally
The threat of civil war in Libya, the world's 12th-largest oil producer, drove U.S. crude oil prices up $5.22, or 6%, to $91.42 a barrel in electronic trading Monday, when most domestic financial markets were closed for Presidents Day. The price is nearing the two-year high of $92.19 reached Jan. 31.With gasoline prices already elevated — topping $3.50 a gallon in California — higher crude costs could further increase the pain at the pump for consumers and businesses.
That, in turn, could undercut the main assumption underlying the stock market's latest advance: that the economic recovery would gain momentum in 2011, boosting job growth from last year's anemic levels.
European stock markets, which like the U.S. market have rallied sharply this year on expectations that the global economy would continue to rebound, tumbled Monday as oil prices zoomed.
The Italian market sank 3.6%, Spanish shares slid 2.3% and the German market lost 1.4%.
Selling also hit Asian stocks early Tuesday, as Japan's benchmark Nikkei index slumped 2% and the South Korean market dropped 2.2%.
Some investors fled for classic havens, including gold and U.S. Treasury bonds. Gold was trading at $1,410 an ounce in Asia, up from Friday's closing price of $1,388 and nearing the record high of $1,422.60 reached Jan. 3.
The yield on the five-year Treasury note fell to 2.2% from 2.27% on Friday. Yields fall as bond prices rise.
On Wall Street, the Dow Jones industrial average closed Friday at a 2 1/2 -year high of 12,391.25, up 7% year to date and up 24% since Aug. 31.
Even as the unrest in the Middle East has escalated in recent weeks, U.S. share prices have remained in a steady uptrend, defying skeptics who say the market has been overdue for a pullback.
Bearish investors say stocks have been artificially supported by the Federal Reserve's easy-money policy. Besides holding short-term interest rates near zero for the last two years, the Fed has since November resumed a campaign of buying hundreds of billions of dollars' worth of Treasury bonds — an effort to help the economy by pumping more money into the financial system and trying to suppress longer-term interest rates.
Fed Chairman Ben S. Bernanke has said that one goal of the central bank's bond-buying program was to boost investors' confidence in the economy, thereby underpinning the stock market.
Market pessimists also note that stocks' climb in recent weeks has occurred amid shrinking trading volume. That has raised suspicions that the rally has been driven by computerized trading programs that are merely riding the trend, not by long-term investors betting on a sustained economic recovery.
But Wall Street's bulls say the bears refuse to acknowledge the improving fundamentals that have supported the rally and could limit any rush for the exits.
Economic data have largely indicated that the momentum of the fourth quarter spilled into 2011. Driven by consumer spending, gross domestic product grew at a 3.2% real annualized rate in the fourth quarter, the fastest pace since the first quarter of 2010.
Investors also have been cheered by solid fourth-quarter corporate earnings reports. Operating earnings of the Standard & Poor's 500 companies were up 37% in the quarter from a year earlier, according to Thomson Reuters.
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