NEW YORK — Wall Street tumbled Friday, taking the Dow Jones industrials down nearly 400 points, on a pair of alarming 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 after 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 to 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. 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 persuaded 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.
A leap in joblessness
The spike in energy prices came as the Labor Department said the nation’s unemployment rate had 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 its 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.
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.
Weak dollar boosts oil
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 last week on the possibility of rate hikes, has 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.
