The stock market's spectacular rally since August has powered past every potential obstacle. But now the bulls' path may be blocked by an old enemy: the gas pump.
Middle East revolt and the side effect of surging oil prices are threatening to finally give investors a reason to turn cautious, after share prices have spent nearly six months gliding up to multiyear highs.
"If you were looking for a pullback in stocks, this certainly would be a great excuse," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.
The threat of civil war in Libya, the world's 12th-largest oil producer, drove U.S. crude oil prices up $5.22, or 6%, to $91.42 a barrel in electronic trading Monday, when most domestic financial markets were closed for Presidents Day. The price is nearing the two-year high of $92.19 reached Jan. 31.
With gasoline prices already elevated — topping $3.50 a gallon in California — higher crude costs could further increase the pain at the pump for consumers and businesses.
That, in turn, could undercut the main assumption underlying the stock market's latest advance: that the economic recovery would gain momentum in 2011, boosting job growth from last year's anemic levels.
European stock markets, which like the U.S. market have rallied sharply this year on expectations that the global economy would continue to rebound, tumbled Monday as oil prices zoomed.
The Italian market sank 3.6%, Spanish shares slid 2.3% and the German market lost 1.4%.
Selling also hit Asian stocks early Tuesday, as Japan's benchmark Nikkei index slumped 2% and the South Korean market dropped 2.2%.
Some investors fled for classic havens, including gold and U.S. Treasury bonds. Gold was trading at $1,410 an ounce in Asia, up from Friday's closing price of $1,388 and nearing the record high of $1,422.60 reached Jan. 3.
The yield on the five-year Treasury note fell to 2.2% from 2.27% on Friday. Yields fall as bond prices rise.
On Wall Street, the Dow Jones industrial average closed Friday at a 2 1/2 -year high of 12,391.25, up 7% year to date and up 24% since Aug. 31.
Even as the unrest in the Middle East has escalated in recent weeks, U.S. share prices have remained in a steady uptrend, defying skeptics who say the market has been overdue for a pullback.
Bearish investors say stocks have been artificially supported by the Federal Reserve's easy-money policy. Besides holding short-term interest rates near zero for the last two years, the Fed has since November resumed a campaign of buying hundreds of billions of dollars' worth of Treasury bonds — an effort to help the economy by pumping more money into the financial system and trying to suppress longer-term interest rates.
Fed Chairman Ben S. Bernanke has said that one goal of the central bank's bond-buying program was to boost investors' confidence in the economy, thereby underpinning the stock market.
Market pessimists also note that stocks' climb in recent weeks has occurred amid shrinking trading volume. That has raised suspicions that the rally has been driven by computerized trading programs that are merely riding the trend, not by long-term investors betting on a sustained economic recovery.
But Wall Street's bulls say the bears refuse to acknowledge the improving fundamentals that have supported the rally and could limit any rush for the exits.
Economic data have largely indicated that the momentum of the fourth quarter spilled into 2011. Driven by consumer spending, gross domestic product grew at a 3.2% real annualized rate in the fourth quarter, the fastest pace since the first quarter of 2010.
Investors also have been cheered by solid fourth-quarter corporate earnings reports. Operating earnings of the Standard & Poor's 500 companies were up 37% in the quarter from a year earlier, according to Thomson Reuters.
The strength and breadth of the stock market's gains this year have lured back individual investors, who for much of the last two years have been funneling their savings into bonds.
Net cash inflows to domestic stock mutual funds totaled $16.6 billion in the five weeks ended Feb. 9, the largest sum since spring 2009, according to the Investment Company Institute.
The risk now is that those investors have come too late to the game. A steep sell-off could cause some recent buyers to flee at a loss — and to swear off stocks for good.
Yet some money managers warn against assuming that the market has to suffer a severe hit based only on current oil prices.
"Many investors are waiting with their dollars to see if this is going to mean anything or not," said Michael Farr, who heads investment firm Farr, Miller & Washington in Washington, D.C.
Harris Private Bank's Ablin noted that, despite the stock market's gains since August, "We're not wildly overvalued," which could mean that investors will be reluctant to sell.
Among the S&P 500 stocks, the average price-to-earnings ratio — a standard measure of value — was only about 14 based on expected 2011 earnings per share. The market's long-term average ratio is about 16.
Still, a continued rise in energy prices clearly would risk depressing consumer spending, which accounts for more than 70% of U.S. economic activity.
When oil prices rocketed in the first half of 2008, leading a broad advance in commodity prices, the effect was to weaken an economy already struggling under heavy debt loads. That made the economy more vulnerable to a crash when the financial-system crisis hit in September 2008.
If energy costs spiral significantly higher, "We've seen this movie before, and it doesn't end well," Ablin said.