As the Egyptian military confronted protesters in the streets of Cairo, investors had to confront volatility again. So much for recent assumptions that investors had been inoculated against risk.

The Standard & Poor’s 500 was on the brink of reclaiming 1300 for the first time since September 2008—until the Mideast turmoil sparked a 1.8% drop Friday, pushing the index down to 1276, the second down week in a row.

The Dow, meanwhile, kept flirting with the 12,000 mark, only to drop 1.4% Friday, closing at 11,823 and notching its first weekly loss after eight weeks of gains. The industrial average hasn’t closed north of 13,000 since June 2008.

Securities linked to the Middle East violence shuddered even more violently. The cost of insuring Egyptian government debt rose 25% last week. The Market Vectors Egypt Index, which trades in the U.S., tumbled 3.5% Friday.

In the flight to safety, Treasuries and the dollar both rallied—although news that U.S. gross domestic product had risen an annualized 3.2% in fourth-quarter 2010 drove the yield on the 30-year bond to a nine-month high. Meanwhile, gold prices jumped nearly 2% Friday, their biggest one-day rise in three months.

“Markets have come a long way in a short period of time,” Dan Veru, chief investment officer at Palisade Capital Management.  “But the geopolitical risks are a caveat, and could change the view.” Indeed, Friday’s shudder dashed many investors’ hopes of revisiting previous milestones.

“Investors are hungry for success with their portfolios, and want to at least get back to the levels of 2008,” says Kimberly Foss, president of Empyrion Wealth Management in Roseville, Calif. “I think there’s still a lot of cash building on the sidelines.”

In fact, while some of that money has begun to slowly trickle into the market, fund flows into equities have only recently turned positive. This despite generally constructive quarterly corporate-profit statements. According to Bespoke Investment Group, 70% of companies that have reported fourth-quarter results have beaten their revenue estimates, a remarkably high number. Even financials, which haven’t fared as well as other sectors in the big rally off the March 2009 lows, are beating revenue estimates by that same 70%.

“We’ve managed to proceed without the biggest participant in the S&P 500 not doing much,” says Palisade’s Veru. ”It’s amazing we’ve gotten the kind of gains that we have.”

(Source: Barrons Online)