David Kelly: All eyes on oil

The following is the market commentary of David Kelly, the Chief Market Strategist at J.P. Morgan Funds, for the week of March 21, 2011:

Once again this week, markets will focus on events far from both Wall Street and Washington.

Over the last week, the scope of the tragedy in Japan has become clearer, with 8,000 reported dead and another 12,000 missing. The physical damage has also been dramatic, with rough numbers running 50% higher than $120 billion estimated for the Kobe earthquake of 1995. However, the additional threat of major casualties from radiation at the Fukushima nuclear plan seems to have waned. If this is the case, then, while this disaster will cut Japanese and global economic growth in the first half of 2011, it could actually add to growth in the second half.

However, just as markets begin to come to terms with the Japanese crisis, the conflict in Libya has taken a more dramatic turn, with a coalition of Western powers and Arab states launching an attack on the Gaddafi regieme. While investors will watch events closely, it is not clear what outcome they should be rooting for. While the world would clearly be a better place without the Colonel, an ultimately successful revolution in Libya could help foment rebellion in other parts of the Arab world. This, in turn, could threaten oil supplies from Gulf states- a turn of events which could push oil prices higher and most financial assets lower.

As markets ponder the messages eminating from Japan and Libya, they will also have some economic data to consider. Once again, New Home Sales and Existing Home Sales are likely to remain very low as suggested both by the pending home sales index and weak housing starts numbers.

By contrast, both Unemployment Claims and Durable Goods Orders could see further gains reflecting continuing improvements in both labor markets and business investment spending. The final report on 4th Quarter GDP should not be a market mover but should show further strong gains in corporate profits as measured by the government.

In the final analysis, however, the price of oil may well determine the price of everything else in financial markets this week. For investors, valuation measures heavily favor stocks over bonds. However, with the expansion still vulnerable to mercurial oil prices, the overriding imperative for individual investors is to be balanced.

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Monday, March 21st

Existing Home Sales Forecast Last

Sales, mils, ann rate 5.021 5.360

Inventories, mils 3.518 3.380

Wednesday, March 23rd

New Home Sales Forecast Last

Sales, mils, ann rate 0.295 0.284

Inventories, mils 0.181 0.188

Thursday, March 24th

Jobless Claims Forecast Last

Initial Claims, 000’s 380 385

Continued Claims, 000’s 3,680 3,706

Durable Goods Orders Forecast Last

Total, %ch 2.4% 3.2%

Ex. Transportation, %ch 3.3% – 3.0%

Friday, March 25th

Q4 GDP Final Est 2ndEst

Real GDP, %ch, ann rate 3.1% 2.8%

GDP Deflator, %ch, ann rate 0.4% 0.4%

Consumer Sentiment Final Prelim

Index Level 69.5 68.2

Opinions and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. Past performance is not indicative of future results.

J.P. Morgan Asset Management is the marketing name for the asset management business of JPMorgan Chase & Co., and its affiliates worldwide.

J.P. Morgan Funds are distributed by JPMorgan Distribution Services, Inc., member FINRA/SIPC.