Dow Plummets Nearly 400 Points On Unemployment News, High Oil Prices

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.

Story continues below

advertisement

"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.

___

On the Net:

New York Stock Exchange: http://www.nyse.com

Nasdaq Stock Market: http://www.nasdaq.com

Comments

[watchTVgetSTUPID]

Bush has succeeded in taking the Country the same place he took Arbusto Oil .... BANKRUPT

[Oldbuck]

George have you screw this thing up, We had no homeless until Regain was elected and we started to have homeless all over the country. Then Dad Bush screw it up where he had to extend the unemployment benefits. Then along come George W. who put all the one's that Dad and Ronnie missed really out of there houses.

[Bettysdad]

Wow! Seeing the neat list of Republican horrors in the last few posts is really terrifying. How the hell did these people ever got power?

[evalpor]

You can't ignore the Second Law of Thermodynamics. Unless you don't know what it is.

Like Bush.

[peterv]

The man that actually did demand Euro for his oil was Saddam Hussein in 2000. At first, his demand was met with ridicule, later with neglect, but as it became clearer that he meant business, political pressure was exerted to change his mind. When other countries, like Iran, wanted payment in other currencies, most notably Euro and Yen, the danger to the dollar was clear and present, and a punitive action was in order. Bush’s Shock-and-Awe in Iraq was not about Saddam’s nuclear capabilities, about defending human rights, about spreading democracy, or even about seizing oil fields; it was about defending the dollar,


History teaches that an empire should go to war for one of two reasons: (1) to defend itself or (2) benefit from war; if not, as Paul Kennedy illustrates in his magisterial The Rise and Fall of the Great Powers, a military overstretch will drain its economic resources and precipitate its collapse. Economically speaking, in order for an empire to initiate and conduct a war, its benefits must outweigh its military and social costs. Benefits from Iraqi oil fields are hardly worth the long-term, multi-year military cost. Instead, Bush must have went into Iraq to defend his Empire. Indeed, this is the case: two months after the United States invaded Iraq, the Oil for Food Program was terminated, the Iraqi Euro accounts were switched back to dollars, and oil was sold once again only for U.S. dollars.

[Pleidian]

Right on the money.

[peterv]

In 1971, as it became clearer and clearer that the U.S Government would not be able to buy back its dollars in gold, it made in 1972-73 an iron-clad arrangement with Saudi Arabia to support the power of the House of Saud in exchange for accepting only U.S. dollars for its oil. The rest of OPEC was to follow suit and also accept only dollars. Because the world had to buy oil from the Arab oil countries, it had the reason to hold dollars as payment for oil. Because the world needed ever increasing quantities of oil at ever increasing oil prices, the world’s demand for dollars could only increase. Even though dollars could no longer be exchanged for gold, they were now exchangeable for oil.

[peterv]

Debt is in dollars so thats the only positive point, since the the dollar is worth less in open markets.
Since WW2 far too much money 'invested' in military industrial complex, while other countries invested in development and more substantial investments. The danger is that the petro dollar is vanishing in the future and be replaced by other currencies. One item is hardly noted, that Iran opened a oil bourse where oil only can be traded in other currencies like the euro. Countries that produce oil receive in dollars, and many countries keep a dollar reserve, like used to be for gold. if for some reason oil is more and more traded in euro's and yen, deficit will spiral out of control. Some will argue that Iran and possible conflict is based on petro dollar. Like Saddam refused dollars before invasion.

[pie8ter]

The reason why our economy is weaker now has lot to do with the lower dollar values. The reason why our dollar value is getting lower has to do with what currency is being used to exchange goods in the world market. Major financial markets in the world are starting to use Euro instead of dollars. This is partly because our warmongering attitude towards other countries. Tell this to republican supporters and rednecks...Let's go bust ass attitude must stop. Having the most powerful army in the world means nothing if our economy goes south.

[pie8ter]

Our dollar value will go up on November 5, 2008 when the world reads "President Elect Barack Obama".

[Pleidian]

So will tourism I bet...will they be displaying the current occupants of the White House somewhere? Odessa, perhaps?

[americanalien]

The Bush Regime has raped this country's economy, I will not mince my words. Every economic indicator is pointing downwards. The Iraq war is bankrupting the country. We will not be able to stop this economic hemorrhaging until we end this war and bring our troops home. The Bush policy of tax cuts to the rich and "drop dead" to the middle class which John McCain is now supporting has not worked. The middle class needs more relief and Mr. Obama has proposed a working plan to address that. It's time for us to foreclose the White House on Bush and company.

[SILVANUS]

Remember the summer of 1968?
'Volunteers for America...'

[helonias]

Just think if Jimmy Carter was elected to a second term and we really did something about our energy needs.

As opposed to the Gipper?

[jdenham]

Unfortunately the gas prices are going to continue to rise because the dollar is going to continue to lose value on the world market. Oil cost relatively the same in Europe as it did 5 years ago. The reason for our rise gas prices is tied to the value of the dollar. Bush and Greenspan have been printing money and keeping interest rates low to keep the Stock market from collapsing. Bush's hope is that the Economy won't collapse before he leaves. I don't think he will make it.

[curmudgeon3]

Are you better off than you were on January 20, 2001, the inauguration day for the current Supreme Court appointed occupant of the White House?

To the extent that the relative strength of the U. S. dollar might serve as a yardstick, please consider the following (January 22, 2001 to June 6, 2008):

The U. S. minimum wage on that date was $5.15/hour, rising to $5.85/hour on July 24, 2007. If the minimum wage were to rise sufficiently to maintain purchasing power against four major currencies, it would now be as follows:

Japanese yen -- $5.69
British pound -- $6.92
Canadian dollar -- $7.62
Euro -- $8.64

Similarly, if you were making $50,000 on January 22, 2001, to keep pace with the four aforementioned currencies, your current income would need to be as follows:

Japanese yen -- $55,243
British pound -- $67,184
Canadian dollar -- $73,981
Euro -- $83,884

If you want to check out these numbers for yourself, go to http://www.ny.frb.org/markets/fxrates/historical/

These numbers are extremely important as the march toward a global economy continues.

If you've fallen behind, you and your family are surrendering ground for the financial benefit of others.

Can you and your family afford another four or eight years of continuing to lose ground?

Think this trend would change if John McCain prevails in November?

“The definition of insanity is doing the same thing over and over again and expecting different results”. --Albert Einstein

[CyrusBeaucephus]

Thanks alot Republicans. There's a lesson to be learned here--people who think the Rapture is imminent are not to be trusted with important matters

[angelbravo]

Thank you republicans maybe in the future you can provide few of us jobs protecting you, from the jobless, straving masses.

[andvoodoo2]

Uh, we ARE the "jobless, straving (sic) masses".

And, pennyfortheguy is right, Blackwater is the army of the Repug occupiers. I went through Katrina and saw these guys firsthand. They were no different than the soldiers I saw all over Panama during the revolution in the late 60s, early 70s.