Stocks fall sharply on surge in oil, jobs data

By TIM PARADIS, AP Business Writer

NEW YORK - Wall Street tumbled Friday, taking the Dow Jones industrials down nearly 400 points, on a pair of alarming economic developments: oil prices that shot up by more than $11 a barrel and approached $140 for the first time, and the biggest gain in the government's unemployment reading in more than 20 years.

The jump in oil to a price that might have seemed unfathomable only a few months ago appeared to wipe out investors' recent optimism over the prospects for a strengthening of the economy. Oil jumped following a Morgan Stanley analyst's forecast of $150 oil by July 4, and in response to a drop in the dollar and fresh tensions in the Middle East.

The surge in oil seemed the guarantee that gasoline prices that are on the verge of a national average of $4 a gallon will only continue to climb, putting additional pressure on consumers who have been forced to forgo discretionary purchases in order to pay for gas and other basics. Moreover, consumers who can't find work or who are worried about losing a job will be even more hesitant to spend on extras.

Wall Street has been worried of late that a pullback in consumer spending will deal a blow to the economy, as Americans' expenditures account for more than two-thirds of U.S. economic activity. So Friday's surge in oil convinced many investors to pull money out of stocks that suddenly seemed too risky.

Crude oil saw a huge rebound during the week after falling amid a drop in demand for gasoline. The biggest gains came Friday, with light, sweet crude setting a high of $139.12 in after-hours trading on the New York Mercantile Exchange. Oil settled at $138.54, a gain of $10.75 for the regular session; that was the biggest one-day advance for oil in the history of the Nymex.

The spike in energy prices came as the Labor Department said the nation's unemployment rate jumped to 5.5 percent in May from 5.0 percent in April. It was the biggest monthly increase since February 1986 and the rise leaves unemployment at it highest level since October 2004. Wall Street had predicted an uptick to 5.1 percent.

The number of U.S. jobs shrank by a smaller-than-expected 49,000, but that development offered Wall Street little solace as May marked the fifth straight month of jobs losses.

But the sudden spurt in oil appeared to weigh most heavily on Wall Street. The increase, fueled in part by a weak dollar, also came after an Israeli Cabinet minister hoping to replace Prime Minister Ehud Olmert was quoted as saying Israel would attack Iran if it doesn't abandon its nuclear program.

"I think the biggest concern right now is oil and it's potential for a stagflationary environment," said Bill Knapp, investment strategist for MainStay Investments, a division of New York Life Investment Management. Stagflation occurs when stalling growth accompanies rising prices.

The headwinds facing the economy sent the Dow Jones industrial average down 394.64, or 3.13 percent, to 12,209.81; it was down by as much as 412 points at its low of the session. The decline was the worst percentage and point drop since Feb. 27, 2007, when the blue chips dropped 416.02 points, or 3.29 percent, amid concerns about souring debt and an economic slowdown.

Broader stock indicators also fell sharply Friday. The Standard & Poor's 500 index lost 43.37, or 3.09 percent, to 1,360.68, and the Nasdaq composite index fell 75.38, or 2.96 percent, to 2,474.56. The day's declines were the steepest percentage losses for the S&P 500 and the Nasdaq since Feb. 5 this year.

The Dow Jones Wilshire 5000 Composite Index, an index that measures a wide swath of the U.S market, fell 2.9 percent Friday, a paper loss for the day of about $500 billion.

Investors' nervousness was clear. The Chicago Board Options Exchange's volatility index, known as the VIX, and often referred to as the "fear index," jumped 26.5 percent Friday.

Friday's pullback came a day after the Dow jumped nearly 214 points, its largest daily point gain since April 18 and a reaction to better-than-expected sales from retailers and a dip in weekly jobless claims. The welcome economic news helped investors shrug off a more than $5-a-barrel jump in oil prices. But the advance in oil Friday made it clear to Wall Street that ascendent energy prices posed a serious threat to consumer spending and the economy.

Friday's session capped an erratic week for the markets. Stocks fell Monday and Tuesday before moving sideways Wednesday and surging Thursday. The back-and-forth moves left the Dow down 3.39 percent for the week, the S&P 500 off 2.83 percent and the Nasdaq with a loss of 1.91 percent.

Bond prices jumped Friday after the weak jobs data sent investors scurrying for safety. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.91 percent in late trading from 4.04 percent late Wednesday.

The dollar declined against other major currencies — a move that makes each barrel of oil more expensive. Gold prices jumped.

Knapp remains skeptical of the reasons behind the run-up in oil.

"The supply demand dynamics just don't warrant where we are today. It's becoming incredibly hackneyed to say it's all coming from demand in China," he said. "I think the consensus is that something is going to come along to deflate this commodity bubble and put the stock market back on track."

And the worries about employment and oil may be intertwined.

Ethan Harris, Lehman Brothers' chief U.S. economist, contends that the jobs report helped drive oil prices higher. He said traders are worried that the increase in unemployment would leave the Federal Reserve unwilling to raise interest rates. A notion of a Fed with few options combined with comments from the European Central Bank this week on the possibility of rate hikes have hurt the dollar.

"The weaker dollar is pushing up oil prices because oil is denominated in dollars and oil sellers want to be compensated for the weaker dollar," Harris said, adding that he thinks the market's moves have been overdone.

"While I'm skeptical of the whole thing in terms of whether it makes sense logically, this is the way the market behaves. It's like a Pavlovian response. If the Fed looks soft, oil prices go up," he said.

Declining issues outnumbered advancers by more than 4 to 1 on the New York Stock Exchange, where consolidated volume came 4.69 billion shares, compared with 4.18 billion traded Thursday.

The Russell 2000 index of smaller companies fell 22.90, or 3.00 percent, to 740.37.

Wall Street's pullback weighed on Europe. Britain's FTSE 100 ended down 1.48 percent, Germany's DAX index fell 1.99 percent, and France's CAC-40 lost 2.28 percent on the day. Japan's Nikkei stock average closed up 1.03 percent; trading there ended before the release of the U.S. jobs report.

The Dow Jones industrial average ended the week down 428.51, or 3.39 percent, at 12,209.81. The Standard & Poor's 500 index finished down 39.70, or 2.83 percent, at 1,360.68. The Nasdaq composite index ended the week down 48.10, or 1.91 percent, at 2,474.56.

The Russell 2000 index finished the week down 7.91, or 1.06 percent, at 740.37.
The Dow Jones Wilshire 5000 Composite Index — a free-float weighted index that measures 5,000 U.S. based companies — ended Friday at 13,924.63, down 336.13 points, or 2.36 percent, for the week. A year ago, the index was at 15,343.15.