News & Our Thinking

On Friday, President Barack Obama threatened a military strike on Libya as cries for revolution kept echoing across the Mideast oil patch. Japan was leaking radiation a week after the quake and tsunami flattened parts of the globe’s third-biggest economy.

So, how did the stock market react? The Dow Jones industrial average closed up 84 at 11,858 for the day.

Sure, stocks are down 4 percent from their high of last month. Still, an investor might wonder what it would take to get a full-blown market correction (defined as a drop of 10 percent) going these days.

Apparently war, tectonic calamity and $3.37-a-gallon gasoline isn’t enough.

The glass-half-full crowd still predominates among the investor class.

They point to signs of an improving job market, a recovering consumer and, most of all, bright prospects for profits at American companies. Expect markets to be choppy for a while, say gurus of this optimistic persuasion, and a deeper correction is still possible if events turn sour. But they think the most likely direction for stocks is up.

“It’s a buying opportunity,” says Kate Warne, investment strategist at the Edward Jones brokerage in Des Peres. The market’s refusal to crash shows “how good the overall environment is when the disaster occurred,” she added.

Japan? Nothing to worry about, she says.

“Stocks tend to sell off quickly after a natural disaster. But the decline tends to be brief,” Warne says. Then the market starts looking toward the next step – rebuilding – which boosts demand and company profits. Stocks are usually fully recovered a month after the shaking stops.

The damaged area of Japan supplies just half a percent of the global economy. So, a little dip in worldwide activity over the next few months will be made up when the rebuilding gets rolling later this year, she says.

“It’s going to end up as a big, unanticipated global stimulus,” agrees Bill O’Grady, chief market strategist at Confluence Investment Management in Webster Groves.

O’Grady had predicted a 1,350 level for the S&P 500 by late summer’s end but now thinks that “may be a little conservative.” The S&P closed Friday at 1,279.

O’Grady thinks the disaster will put a crimp in plans to expand nuclear power in the world’s democracies, but perhaps not in China. That’s good for coal mining stocks, he says. Stock in St. Louis-based Peabody Energy, the biggest American coal miner, is up 14 percent since the quake.

If Japan isn’t enough to give investors a good fright, how about the Middle East? The fighting in Libya and street protests across the region took oil prices from the $90 range to more than $100 per barrel. They would be a lot higher if revolution spread to Saudi Arabia, which has been quiet so far.

Gasoline in the mid-$3 level is “absorbable,” Warne says. “The United States is a service economy. Wages matter a lot more than energy prices.”

The American job picture is looking a little better. Layoffs are down to pre-recession levels and hiring is up, although unemployment is still high at 8.9 percent. Consumer spending is picking up slowly.

Corporate profits are the rosiest part of the picture. Analyst expect profits on the S&P 500 index to rise 14 percent this year.

That’s a buy signal, says John Meara, president of Argent Capital Management. The price-earnings ratio on the S&P Index of big company stocks is 15 on trailing earnings and 13 on this year’s expected earnings. The historical average is about 16.

Meanwhile, low interest rates make bonds an ugly alternative.

Meara expects to see the S&P at 1,500 a year from now, for a 17 percent gain.

At Edward Jones, Warne likes big global companies at this point in the economic recovery. United Technologies, Schlumberger, Colgate, Coca-Cola and Chevron are on her buy list.