The specter of worsening conflict in the Middle East helped oil prices edge closer to $80 a barrel in mid-July. As a result, stock prices plummeted, wiping out nearly all the modest gains recorded by the major indexes for the year. Discouraging reports about consumer spending and confidence gave investors another reason to pull back, making the week ending July 14 - the half-year mark - one of the worst investors have seen for a long time. The marketís declines left the Standard & Poorís (S&P) 500 and the Nasdaq composite index in negative territory for this year. The Dow Jones Industrial Average managed to cling to a gain - albeit a very small one - of 0.20 percent for the year.
What should we make of all this and what kind of impact will further geopolitical upheaval have on the markets? Some definite indications have emerged from recent trends and predictions abound. Hereís what some market experts are saying:
- A few months ago, $80-a-barrel oil seemed like a worse case scenario. Now, traders say it is just a matter of time. Oil futures for delivery after summer passed the $80.00 mark on July 11. In this scenario, investors are hard pressed to find well-priced energy stocks. Experts who view this sector suggest that there still may be opportunities among companies who transport and store crude oil and gas. Many pipeline companies that are structured as limited partnerships offer good dividend yields. The tax implications can be complex, so be sure to consult your professional advisor about the possible impact on your tax situation.
- Remain calm and stay the course. Try no to fall victim to the "Chicken Little" syndrome. Oil markets traditionally are sensitive to any instability - political, territorial or economic - in the Middle East. Apart from the rapidly escalating situation in Lebanon, the market is also concerned about Iran and North Korea, in light of their respective nuclear programs. When international geopolitical scares like these abound, we often see a knee-jerk response to every piece of less-than-positive domestic news. Accordingly, we saw investors overreact to mid-July reports indicating weak retail sales and lower consumer confidence. A week or two earlier, these reports would not have had such a dramatic affect on the market, but in a jittery environment, data that would merit scant attention receives more scrutiny.
- Consumer spending will continue to be a major factor in stock market performance. Factoring in a certain degree of overreaction, experts continue to debate how resilient consumer spending will be. Some believe that high gas prices, stock market jitters and reduced levels of consumer confidence will hobble consumer spending in the second half of 2006. Others believe that the July numbers were skewed by poor auto sales, and that consumersí appetite for other goods will remain strong. The optimists believe spending increases will continue, spurred by wage gains and growth in the job market.
Bottom line: many experienced market analysts donít regard mid-Julyís decline as an indicator of a larger unraveling of the U.S. economy. Many remain bullish and believe the fundamentals for the current market are still solid. Whatever their position - bullish or bearish - market experts agree on one thing. When bad news clouds the market, it is truly difficult to determine real underlying trends. Better to postpone making major investment decisions until these initial jitters have subsided.