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Buy Energy, Commodities, Money Managers Say

BOSTON ( TheStreet) -- Middle East turmoil has pushed up oil prices to more than $100 a barrel, making accelerating inflation the greatest threat to the fragile U.S. economic recovery since Europe's debt woes.

Still, professional investors including Robert Pavlik, chief market strategist at Banyan Partners, and Paul Nolte, director of investments at Dearborn Partners, say the economy is resilient enough to withstand higher commodities prices. Improvements in retail sales, the manufacturing industry and the job market have prompted the Federal Reserve to say this week that the economy "continued to expand at a modest to moderate pace."

Investors have been jolted by populist uprisings in the Middle East and North Africa, which have threatened to disrupt oil supplies, causing a spike in prices. Nouriel Roubini, the economist who correctly forecast the financial meltdown almost three years ago, said this week that an escalation of unrest may push prices to as high as $150 a barrel. The benchmark S&P 500 Index of the largest U.S. companies tumbled 1.6% Tuesday as fears rippled through the markets.

Violent protests that led to the ouster of Hosni Mubarak in Egypt have also unsettled Libya, where anti-government protesters are rebelling against Moammar Gadhafi's regime. Those uprisings have sparked similar protests in other Middle Eastern and North African countries, including Bahrain, Saudi Arabia, Yemen, Tunisia, Cote D'Ivoire and even Iran.

Fear and uncertainty over the Mideast crisis has resulted in a so-called flight to quality, with gold prices rising to all-time highs after declines earlier in the year.

Since the Egyptian protests began Jan. 25, the S&P 500 has climbed 1.4%, but after oil prices spiked from $86 a barrel to nearly $100 on Feb. 18, the broad stock-market index has slumped 2.5%. As March 6 marks the two-year anniversary of the market bottom, investors now question whether the bull-market rally that has produced returns of almost 80% is finally over.

Since Feb. 18, recent high-fliers such as Netflix (NFLX), First Solar (FSLR) and AIG (AIG) have been among the worst-performing members of the S&P 500. On the other hand, energy firms like Chesapeake Energy (CHK), Cabot Oil & Gas (COG) and Consol Energy (CNX) have been the biggest winners.

But those rocket stocks aren't the only ones getting punished. Economic barometers such as FedEx (FDX), (AMZN), U.S. Steel (X) and Ford (F) are each down 7% or more since Feb. 18. The consumer-discretionary sector has also been pummeled, with the Retail HOLDRs ETF (RTH) dropping 3.5% over that time.

Kevin Mahn, managing director and chief investment officer with Parsippany, N.J.-based Hennion & Walsh, notes that this is around the time when most portfolio managers and advisors reset their asset-allocation strategy for the new year. He advises clients to keep a steady hand.

"They should build a long-term allocation strategy and stick to it outside of any significant macroeconomic events," Mahn says. "There are opportunities for good risk-adjusted growth if you look beyond your traditional U.S. large-cap asset class."

Mahn says his firm, which has $300 million in assets under management or supervision, has pared fixed-income holdings in lieu of commodities. There is also a greater emphasis on value rather than growth, he says. "So many U.S. corporations are sitting on piles of cash and will most likely be buying back stock, buying companies or increasing their own dividends."
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