Will Energy Prices Cause a Double-Dip Recession?

Mac, Ashley and Greg meeting2/7/11: In the markets, as in life, there are no guarantees but everyone is entitled to their opinion. Here’s my opinion on the financial markets today.

Companies in the United States will try to keep the recent momentum going with 62 S&P 500 corporate earnings reports coming out this week.  This morning, U.S. stocks opened slightly higher on some incremental calm in Cairo.  Solid earnings and gains in resource sectors helped lift European markets to a 29-month high, while Asian markets were mixed with Japan’s Nikkei higher and the Hang Seng lower.  Crude prices fell as investors “look past” the Egyptian crisis, while agricultural and metal prices are solidly higher.  Today’s economic calendar includes data on consumer credit, which is due out this afternoon.

Looking back to Friday, the S&P 500 only managed a three-point gain Friday following the mixed jobs report, but it was enough to post its best weekly gain since early December at nearly 3%.  Investors “weather-adjusted” the disappointing payroll report number, which fell about 100,000 jobs short of expectations, while the lower unemployment rate was encouraging to some despite the large number of workers leaving the work force.  Buying was focused in Technology (+0.8%) and Consumer Discretionary (+0.7%), while only Energy (-0.3%) and Utilities (-0.7%) finished in the red.  Earnings reports were generally well received, especially health insurer Aetna’s, although the schedule was light.

Around our financial planning firm this morning, we were discussing three items that we thought would be of particular interest to our readers:

As yields approach 4%, investors are beginning to wonder when rising interest rates may start to negatively affect stock prices. While rising interest rates may eventually pose a problem for stocks as the mountain of debt and rising commodity prices build, the tipping point of 5% is still a significant distance away.  In the meantime, rising yields are good news for stocks.

The week after the release of the monthly employment report is usually a quiet one for economic data in the United States, and this week is no exception. Although the market will digest reports on consumer credit outstanding, wholesale inventories, and imports/exports for December, none of the reports is likely to be “market moving,” as the fourth quarter of 2010 is now a distant memory.  Instead, markets may place more focus on the regular slate of weekly data on retail sales, mortgage applications and initial claims for unemployment insurance.  Although this data is likely to again be impacted by severe winter weather, it will shed some light on how the economy was performing as January turned to February.

How possible is it that rising energy prices could cause a double-dip recession? In December 2010, consumers spent $646 billion (on an annualized basis) on gasoline, electricity, home heating oil, natural gas, etc.  That figure represented just over 6% of total consumer spending.  Since hitting a low of 4.8% of spending in late 2008/early 2009, energy spending by consumers as a percent of total spending has moved steadily higher, although it remains well below the peak hit in mid-2008 of 7%.  On balance, although the current rise of energy prices is being watched closely, it does not appear to be either far enough or fast enough to suggest that the economy is headed for a double dip.  In 2008 (and 1981, when the second leg of the double-dip recession ensued), the labor market was deteriorating, real incomes were stagnating, inflation, interest rates, and most importantly, consumer debt levels were high and rising.  Today, the labor market is improving, real incomes are accelerating, and inflation, consumer interest rates and, most importantly, consumer debt levels, are falling.

As always, email me here with your questions or comments.  I love to hear from you and thoroughly enjoy the “intellectual debate” with our clients and friends that these opinions generate.

Greg Powell, CIMA
Wealth Consultant

Note: The opinions voiced in this material are for general information and are not intended to be specific advice. Any indices such as the S & P 500 can’t be invested into directly. Past performance is no assurance of a future result.

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