MarketView for January 28

Summary 

One of the difficulties of investing on Wall Street has nothing to do with the performance of individual companies and everything to do with global politics. This was never in more evidence than on Friday as the rioting in Egypt sent share prices tumbling and the major equity indexes falling to their largest decline in six months.

The increased instability in the Middle East drove up the CBOE Volatility Index .VIX, the stock market's fear gauge, as investors scrambled for protective positions. The VIX settled up 24.1 percent at 20.04. The percentage gain was the largest since May 20.

Egyptian President Hosni Mubarak sent troops and armored cars into cities in an attempt to quell street fighting and mass protests, and medical sources said at least five protesters had been killed and 870 wounded.

Treasuries prices and the dollar -- assets considered safe compared to stocks -- rallied. Crude oil futures rose 4.4 percent to $89.43 a barrel as the protests in Egypt threatened Middle East stability. Oil companies with operations in the region were hit, including Apache and Occidental Petroleum. Apache shares were down 1.3 percent to close at $144.84, while Occidental Petroleum fell 3.3 percent to $93.81.

Trading volume was the highest of the year at 9.97 billion shares on the three major exchanges as compared to last year's estimated daily average of 8.47 billion shares. The market drop ended the Dow's eight-week winning streak and pushed the S&P 500 below its 14-day moving average for the first time in two months. Disappointing results from Amazon.com and Ford further added to the gloom.

Amazon.com closed out the day down 7.2 percent to $171.14, a day after the online retailer recorded revenue below the consensus view. Ford fell 13.4 percent to close at $16.27 after a steep drop in quarterly profit. General Motors was also down, falling 5.4 percent to close at $36.60.

Developments in the Middle East could be a trigger for investors to sell at a time when many expected a correction after a market rally of about 18 percent since September. For the week, the Dow Jones industrial average was down 0.4 percent, the S&P fell 0.5 percent and the Nasdaq was down 0.1 percent.

Microsoft added to the misery, closing down 3.9 percent at $27.75, a day after it announced lower quarterly earnings. Equities garnered a bit of support from the day’s economic data that indicated  the U.S. economy grew at a 3.2 percent rate in the fourth quarter as consumer spending accelerated.

GDP Grows at 3.2 Percent Rate in Fourth Quarter

The economy gathered speed in the fourth quarter to regain its pre-recession peak with a big gain in consumer spending and strong exports, removing doubts about the recovery's sustainability. According to a report released by the Commerce Department on Friday, the economy grew at a 3.2 percent annual rate in the final three months of 2010, after expanding at a 2.6 percent pace in the third quarter.

The composition of growth gave the report a surprisingly robust tenor: strong consumer and business spending, and a hint at a need for businesses to build up inventories. For the whole of 2010, gross domestic product was up 2.9 percent, the largest gain since 2005 but an advance too weak to reduce the unemployment rate, which ended the year at 9.4 percent. Output contracted 2.6 percent in 2009.

"I think there is much more confidence now that we've got a sustainable expansion," U.S. Treasury Secretary Timothy Geithner said at the World Economic Forum in Davos, Switzerland before the data was released. However, he cautioned: "It is not a boom. It's not going to offer the prospect of a rapid decline in the unemployment rate."

During the fourth quarter, consumer spending grew at a 4.4 percent rate, the fastest since the first three months 2006. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, added about 3 percentage points to GDP growth, its largest contribution in more than four years.

Consumers are growing more confident. The Thomson Reuters/University of Michigan's consumer sentiment index rose to 74.2 from 72.7 early this month, a separate report showed.