NEW YORK (Reuters) - U.S. stocks may struggle to return to firmer footing this week if anti-government riots in Egypt destabilize the Middle East, keeping investors on edge.
Cautious trading could also come if earnings do not outperform and erode optimism about profits. The government’s January jobs report on Friday will highlight the week’s economic data.
Worries that Egypt’s unrest could spread to other countries in the Middle East, home to the world’s top oil exporters, caused investors on Friday to pull out of stocks and into bonds and other safer assets. U.S. crude futures settled more than 4 percent higher on Friday.
Market volatility skyrocketed on Friday as indexes tumbled and investors scrambled to hedge against further losses. The VIX index .VIX, the market’s fear gauge, rose 24 percent, its biggest daily percentage jump since May 20.
By Sunday, more than 100 people had been killed in Egypt after five days of protesting the government of Hosni Mubarak. Protests in other nations has investors worried about destabilization in the region.
“I don’t like this. It is spreading and contagion risk is rising,” said David Kotok, chairman and chief investment officer at Cumberland Advisors in Sarasota, Florida.
Investors were also worried that an extended rise in oil prices could hurt global recovery. Analysts had been forecasting a pullback in the market for weeks, given the recent sharp gains, and said the Egypt news could be an excuse for some investors to sell.
“It could well turn out to be a short-lived correction, and it would be dangerous to try and time this thing,” David Kelly, chief market strategist for JPMorgan Funds in New York, said, noting he has a long-term bullish outlook.
The Standard & Poor's 500 index .SPX is still up 18 percent since the start of September, roughly when the current rally began.
The Dow Jones industrial average .DJI snapped an eight-week streak of gains with Friday's close. The S&P 500 and Nasdaq also ended with losses for the week.
The Nasdaq fell more than 2 percent on Friday while the S&P and Dow both were down more than 1 percent.