Good Greece. Bad Iran.

Weekly Update – February 20, 2012

Despite a turbulent week filled with mixed news from Europe and rising Middle East tensions, stocks closed higher on hopes that Chinese assistance would mean a bailout plan for Greece. The S&P 500 closed at 1361.23, a level not seen in nearly a year, having gained 8.2% so far in 2012. Other major indexes also rose for the week, the Dow advancing 1.2% and the Nasdaq climbing 1.7%.[i]

In not-so-great news, crude oil prices rose for a third straight day on U.S. markets Friday, topping $103 a barrel, sparked by increased saber rattling from Iran over its nuclear energy policies. A sustained surge in prices could weigh on the global economic recovery. Drivers are seeing the effect at the pump, with gas prices up by 0.9% since January, topping $3.50 a gallon in many places. Every added penny at the gas pump diverts roughly $1 billion in consumer spending away from other sectors of the economy.[ii]

Thankfully, inflation isn’t looking bad overall. The Consumer Price Index (CPI) only rose 0.02% in January, which was in line with expectations. The Core CPI, which excludes food and energy, also matched expectations, gaining 0.02%. Year-over-year gains were 2.9% for the general CPI and 2.3% for the Core CPI. If overall inflation was higher, economic growth could be threatened by rising prices, and the Fed would likely respond by raising interest rates. The Fed’s statement following the January FOMC report described price pressures as “subdued”, and indicated that they plan to keep rates low until at least late 2014.[iii]

In simple English, last week was really a mixed bag. While we are happy with the stock market’s performance, progress in Europe, and low inflation, unrest in the Middle East is a wild card. Every time bad news out of that region hits headlines, speculators drive gas prices through the roof. At this point, all we can do is monitor the situation, hoping that with diplomatic pressure, Iran will listen to reason.

ECONOMIC CALENDAR:
Monday: U.S. Markets closed for President’s Day
Wednesday: Existing Home Sales
Thursday: Jobless Claims, FHFA Housing Price Index, EIA Petroleum Status Report
Friday: Consumer Sentiment, New Home Sales

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized.
Sources: Yahoo! Finance, MSCI Barra. Past performance is no guarantee of future results.
Indices are unmanaged and cannot be invested into directly. N/A means not available.

HEADLINES:

Greece won a second massive financial bailout in the early hours of Tuesday morning when its partners in the 17-country Eurozone finally stitched together a €130 billion ($170 billion) rescue, meant to avoid a potentially disastrous default and secure the euro currency.[iv]

Congress passed a payroll tax cut and job benefits bill in a rare show of bipartisan support. Under the new bill, workers would continue to receive a two percentage point increase in their paychecks (taken out of the 6.2% Social Security payroll tax). People out of work for more than six months would keep jobless benefits averaging about $300 a week.[v]

Jobless claims plunged last week to a nearly four-year low, in the latest bit of good news for the U.S. economy. Initial unemployment claims totaled 348,000 in the week ended Feb. 11, said the U.S. Department of Labor. That’s 13,000 less than the week before.[vi]

Iran threatened to disrupt oil trade through Strait of Hormuz in response to pressure from the U.S. and European Union to shut down a uranium enrichment program aimed at producing nuclear weapons. Oil prices have been rising steadily since hitting a seasonal low in October.[vii]

QUOTE OF THE WEEK:

“Great minds discuss ideas. Average minds discuss events. Small minds discuss people.” – Eleanor Roosevelt