The U.S. Government should be highly motivated to help calm the tensions in the Middle East...
Faith in the Recovery Waning Over Middle East Strife
By JONATHAN FUERBRINGER
The New York Times
April 3, 2002
THE escalation of violence in the Middle East is undermining investor confidence that the recovering economy will lead to higher stock prices.
The surprising strength of the American economy has been supporting the stock market with promises of a rebound in corporate earnings that have helped all three major indexes rebound from their lows for this year.
But the surge in the price of oil, which jumped to its highest in six and a half months yesterday, and the rise in interest rates, with the yield on the Treasury's 10-year note now not far from 5.5 percent, are worrying to investors.
In addition, the hope of a return to growth in corporate earnings has to be borne out in the reports for the first quarter and projections for later this year that companies are to begin releasing this month.
Although some analysts argue that oil prices and interest rates have to move much higher for there to be a real problem for the stock market, that does not mean that the current uncertainty will not make for some extra volatility in the stock market in the months ahead.
"These things are weighing the market down," said Frederick B. Taylor, chief investment officer at the U.S. Trust (news/quote) Company, alluding to the Middle East, oil prices and interest rates.
There is a fear among some investors, Mr. Taylor said, that the economy is recovering so fast "that the Federal Reserve will raise interest rates too soon and stifle the economy and the stock market."
In the stock market yesterday, the Dow Jones industrial average fell 48.99 points, or 0.5 percent, to 10,313.71. It is still 7 percent above its low for the year and has not dropped below 10,000 since late February. The Nasdaq composite index lost 58.22 points, or 3.1 percent, to 1,804.40, and is 5 percent above its low for the year.
The main fallout so far from the violence in the Middle East has been a rise in the price of oil. In the last three weeks, the price of a barrel of crude oil for May delivery has jumped 14.5 percent, to $27.71 on the New York Mercantile Exchange.
Iraq has urged other Arab nations to reduce oil shipments to the United States. Kamal Kharazi, the Iranian foreign minister, said yesterday in Kuala Lumpur, Malaysia, that Iran might support a decision to cut off oil shipments to the United States, according to Bloomberg News.
William Schneibolk, a director at the PIRA Energy Group, an international energy consultant, said that much of the 54 percent jump in the price of crude oil since its January low was because of increased demand as the economies in the United States and other countries rebounded. But the rise in the price in the last few days, he said, was a reflection of the political and supply uncertainty created by the violence in the Middle East.
He said, however, "we don't believe that the Organization of the Petroleum Exporting Countries would take any action to interfere with the flow of oil to the United States." He noted that the United States did not import oil from Iran and that the amount of oil imported indirectly from Iraq, if shut off, could be replaced easily by increased production from other OPEC countries.
In fact, some major oil producers are already exceeding expected output. Data released yesterday showed that Russia, the world's second-largest oil exporter but not a member of OPEC, actually increased its exports of crude oil in March from February, in an apparent violation of an agreement with OPEC. Reuters, citing people in Russia's Energy Ministry, reported that Russia pumped 2.73 million barrels of oil a day abroad in March, 130,000 barrels a day more than in February.
Mr. Schneibolk did say that the current price of oil was higher now than the level that his company had forecast for this stage of the American and global economic recovery. But he said the violence in the Middle East made it hard to predict how high the price might go.
Matthew Higgins, senior international economist at Merrill Lynch (news/quote), said that the rise in the price of oil was "definitely a downside risk to our forecast." But he said that the economy was growing so much faster than expected just a few weeks ago that the impact of higher oil prices "tends to fade into the background."
Just yesterday, Merrill Lynch raised its growth forecast from the fourth quarter of 2001 to the fourth quarter of this year by half a percentage point, to 4.8 percent.
Even at $30 a barrel, Mr. Higgins said that the resulting drain on consumer spending and the higher costs for businesses would reduce growth this year by just 0.3 percentage point.
Like the price of oil, interest rates have also shot higher sooner than many forecasters had expected, though a bond market rally yesterday brought yields below their recent highs. Still, the 5.34 percent yield on the 10-year Treasury note was not far from the 5.5 percent that many forecasters had predicted for the end of this year.
Mr. Higgins of Merrill Lynch said this is "a normal rise in interest rates" given the recovery of the economy and is already factored into Merrill's forecast.
The third factor is corporate earnings. With the surprising turnaround in the economy, the predictions of earnings growth this year have surged. Merrill yesterday raised its 2002 earnings growth forecast for the companies in the Standard & Poor's index of 500 stocks to 21 percent, up from 15 percent just a month ago.
Many investors, however, may be waiting to see if this bullish earnings outlook is supported in the first-quarter earnings reports coming out this month. The concern is that the stock markets here and abroad are already pretty expensive. "Just as was the case in early January, market valuations look set to place a barrier to any near-term upside movement for global equities," Joseph Rooney, global strategist at Lehman Brothers (news/quote), said in a recent report.
Without a strong confirmation that the promised earnings growth is on the way, high stock valuations may keep many investors — and, therefore, the stock market — on edge for some time. |
