"About this time last year, markets were worried about Mideast turmoil, specifically protests in Egypt. This year brings other fears from the region. Iranian threats to close the Straits of Hormuz—through which much of the world’s oil supply is shipped—have added a substantial risk premium to the price of crude oil.
The threats are not idle. Pentagon officials concede Iran is capable of closing the narrow tanker channel. The US is capable of responding quickly and forcefully, of course, so any such closure would not last for long.
The problem is that the mere threat, if it becomes more credible, might cause maritime insurers to cease covering ships in the area. That would bring traffic to a halt even if no one fires a shot. A stoppage for any reason would make crude oil spike to $150 or more.
That’s not what a shaky world economy needs right now.
The key question, then, is Iran’s intent. Our view is that the rhetoric is intended mainly for domestic consumption. Closing off the Persian Gulf would cut off Iran’s own cash flow. It would also create problems for key allies like China and possibly even give the West justification for striking Iran’s nuclear facilities. So unless someone miscalculates, oil supplies are probably safe.
Meanwhile, the US employment report was slightly encouraging—in the sense that it could have been much worse. We have now seen four consecutive monthly declines in the unemployment rate. Yet the "growth" in jobs (and we use the word loosely) is nowhere near recovery levels. Much more is needed.
We’re also into fourth-quarter corporate earnings season. And of course, Europe remains a key concern. The new year is off to an interesting start.
The best-performing sectors of 2011 turned in some of the worst performances during the first week of 2012. Does that imply a major sector rotation is getting underway? We don’t think so—and here’s why.
Last week we mentioned that utilities was the top-performing domestic category for 2011, and that we wouldn’t be surprised to see some additional gains before year-end due to "window dressing." Utilities plunged 2.7% a couple weeks ago, in what appears to be the unwinding of that window dressing.
Other defensive and strong categories from last year also showed declines or underperformed in the opening week of the new year.
Biotechnology, managed health care, and pharmaceuticals are all performing well. Rather than trying to speculate on which segment will do the best in the coming weeks and months, we believe diversified health-care funds are the best way to capture them all."