Oil spike triggers big selloff of stocks
NEW YORK – Only weeks after it seemed that the stock market was on the road to recovery and the economy might soon follow, the Dow Jones industrial average tumbled more than 350 points Thursday to a 21-month low as the price of oil topped $140 a barrel and worries grew about American consumers’ financial health.
The decline followed a barrage of bad economic news that added to concerns that Americans – knee-deep in debt and having trouble borrowing from banks with their own financial worries – could be forced to rein in spending for years.
Consumers’ expectations for the economy over the next six months are at their lowest level on record, a survey released this week said. Home prices in major U.S. cities skidded 15 percent in the past 12 months, according to another report this week. The price of oil is up 45 percent this year. And last month the U.S. jobless rate jumped to 5.5 percent as employers trimmed payrolls for a fifth consecutive month.
Consumers are “getting hit from all sides,” said Paul Kasriel, chief economist at Northern Trust Co. in Chicago. “The unemployment rate is going up. One of their principal elements of net worth – their house – is going down in value at a pace it’s never gone down before in the post-war period. And of course they’re getting hit with higher food and energy prices.”
Those woes have cast doubt on the economy’s ability to rebound in the second half of the year, as many on Wall Street had expected as recently as a month ago. The hope was that a mix of Federal Reserve interest-rate cuts, tax rebates and a winding down of losses at financial institutions would trigger a midyear rally in the stock market.
But the rate cuts and rebates have had little effect, and many financial companies are still bleeding red ink. Meanwhile, the run-up in oil prices has stoked inflationary pressures, and global growth – the supposed elixir that was supposed to offset U.S. economic weakness – has shown signs of sputtering.
Adding to the angst is the Fed’s decision Wednesday to end its 10-month string of interest-rates cuts. That means the economy probably will have to work through its problems on its own, a process that does not bode well for the stock market – or the job market – in the near term.
The news Thursday was a microcosm of the stock market’s recent afflictions.
In futures trading, oil jumped $5.09 to $139.64, a record closing price, on the New York Mercantile Exchange after briefly topping $140 for the first time.
“It all pivots around the price of oil,” said Gail Dudack, head of Dudack Research Group. “If the price of oil was not galloping higher for the last 12 months we wouldn’t be as worried about homeowners, consumers and profit margins.”
Meanwhile, bank and brokerage stocks were especially hard hit Thursday as a Goldman, Sachs & Co. analyst issued a downbeat report on the sector and investors braced for another likely round of mortgage-related write-offs.
The Dow plummeted 358.41 points, or 3 percent, Thursday to 11,453.42. The blue-chip indicator is down 14 percent for the year and 19 percent from its all-time high set in October.