MarketView for February 25

Summary 

Share prices were higher on Friday, as Wall Street recovered from a three-day sell-off, a sell-off due in no small part to the volatility in oil prices brought about by the unrest in Libya. Nonetheless, unease over the continuing Libyan rebellion will likely keep buying in check. Friday's bounce followed a late recovery Thursday that showed buyers were ready to support shares after a bout of selling.

However, many of the analysts have been calling for a correction in stocks, with the S&P 500 up 25.8 percent since the start of September. Much weaker-than-average volume on Friday cast doubt on stocks' ability to move higher.

Brent crude futures for April rose 78 cents to settle at $112.14 barrel, easing from a 2-1/2 -year high of $119.79 on Thursday after rumors abounded that Saudi Arabia raised its oil output following days of bloody unrest in fellow producer Libya.

As stocks rose, the CBOE Volatility Index, or VIX .VIX, Wall Street's fear gauge, dropped 9.9 percent to 19.22, falling below 20 after three days of sharp gains. At the same time, volume was a low 7 billion shares on the three major exchanges, well below last year's daily average of 8.47 billion.

As a result of the week’s unrest in the Middle East, the Dow lost 2.1 percent for the week; the S&P 500 lost 1.7 percent, breaking a three-week streak of gains, and the Nasdaq was down 1.9 percent.

Equities were under pressure during the week from worries that the turmoil in Libya could spread to other major oil-producing countries, causing gains in energy prices that could become problematic for the economic recovery. The U.N. Security Council was to meet to discuss sanctions against Libyan leaders who are locked in a bloody battle for survival against a popular uprising.

Late last month, protests in Egypt shook the market, but stocks quickly recovered. Adding to the day's positive tone, an index of consumer sentiment rose in February to its highest level in three years, according to the Thomson Reuters/University of Michigan Surveys of Consumers.

Among top supporters of the Nasdaq were shares of Intel, up 2.7 percent at $21.86. A brokerage house began coverage of the company with a "buy" rating. In other company news, Boeing rose 2.2 percent to $72.30 and led the Dow higher after the company won a $30 billion contract to build 179 U.S. Air Force refueling planes.

Financial and material sectors led the S&P 500's gains, with shares of JPMorgan Chase up 1.7 percent to close at $46.68.

Economic Growth Less Than Expected

Consumer confidence hit a three-year high in February, suggesting the economy remained on a solid footing despite soaring gasoline prices. The rise in sentiment was a hopeful sign for the economic recovery after the government said on Friday that growth in the fourth quarter was not as robust as it previously estimated. According to a Commerce Department report released on Friday, gross domestic product grew at an annualized rate of 2.8 percent in the fourth quarter, a downward revision from its initial 3.2 percent estimate a month ago.

The Thomson Reuters/University of Michigan survey's index on consumer sentiment climbed to 77.5, the highest since January 2008, from 74.2 in January -- indicating consumers were weathering higher gasoline prices for now amid optimism about the labor market. The national price for gasoline rose almost five cents this week to an average $3.19 a gallon, the most expensive since October 6, 2008.

Economists at JPMorgan lowered their forecast for first-quarter GDP growth to 3.5 percent from 4.0 percent, citing softer-than-expected consumer spending and possible headwinds from the oil price spike. Harsh winter weather is also seen as a factor weighing on growth.

Political unrest in Libya and parts of the Middle East has pushed crude prices above $100 a barrel, sparking fears among some economists that growth could slow this year. Richmond Federal Reserve Bank President Jeffrey Lacker said on Friday he did not think oil above $100 a barrel or gasoline over $3 a gallon would derail the U.S. recovery. "So far this seems quite manageable," he said on CNBC. "The real danger is in inflation psychology. I think as long as expectations are managed well, we're going to get through this without a burst in inflation." 

Spending by state and local governments, which are under heavy budgetary pressures, shrank 2.4 percent. In all, government spending cut 0.31 of a percentage point from GDP growth.

Growth in consumer spending -- which accounts for more than two-thirds of U.S. economic activity -- was trimmed to a 4.1 percent rate from 4.4 percent. It was still the fastest since the first three months of 2006 and acceleration from the third quarter's 2.4 percent rate. Nonetheless, the pace of growth was too slow to do much to lower the unemployment rate, which fell during the quarter from 9.6 percent to 9.4 percent. It fell again in January to reach 9 percent.

Fed officials have been concerned the economy is expanding too slowly to bring unemployment down significantly. They are likely to view high oil prices primarily as a risk to growth rather than a long-term inflation concern. Fed Chairman Ben Bernanke testifies to Congress on Tuesday and Wednesday, and he is unlikely to suggest much appetite within the central bank for scaling back a $600 billion government bond-buying program launched in November.

The GDP report also showed some upward revisions to business investment, but there were surprise downward tweaks to spending on equipment and software. t also confirmed that the accumulation of inventories by businesses slowed sharply in the fourth quarter, taking a big bite out of GDP growth. Excluding inventories, the economy expanded at a 6.7 percent pace rather than 7.1 percent.

The expansion marked the biggest increase in domestic and foreign demand since 1998. In contrast, domestic purchases grew at a much more moderate 3.1 percent rate. Exports were revised higher, but the upward revision to imports was even greater. In all, trade added 3.35 percentage points to GDP growth.

The report confirmed a pick-up in inflation pressures on surging food and gasoline prices. The personal consumption expenditures index rose at a 1.8 percent rate. However, the "core" price index closely watched by the Fed advanced just 0.5 percent, the smallest gain on record.