Wall Street's momentum has suddenly turned negative as investors retreated in the face of skyrocketing oil prices and other signs of a cooling US economy, and brace for a new US Federal Reserve rate hike.
The Dow Jones Industrial Average posted its biggest weekly decline in more than two months, falling 3.1 percent to 10,297.84, a six-week low.
The Standard and Poor's 500 broad-market index, which poked into positive territory for the year a week earlier, slumped 2.1 percent for the week to 1,191.57. The NASDAQ tech-heavy index retreated 1.8 percent to end Friday at 2,053.27.
Market jitters were heightened as crude oil surged to an all-time record at US$60 a barrel over the past week, and ended Friday just shy of that record at US$59.84 a barrel.
Analysts said sky-high energy costs are likely to curb economic and profit growth, but that other factors are in play as well.
With the Fed set to meet in the coming week, the market will be expecting another quarter-point rate hike but also signs from the central bank on how far it intends to push up rates and how strong the economy is.
David Rosenberg at Merrill Lynch said the stock market and the economy are being hit by a "triple whammy" of high oil prices, a rising dollar that cuts into US profits and the Fed rate moves.
"The Fed's tightening to date has practically guaranteed that growth will slow going forward," he said.
"The economy is slowing down but does not appear to be in danger of recession so long as the Fed refrains from raising the funds rate above 4.0 percent," he said.
"There now seems to be nearly irrefutable evidence that the economy is slowing," Wachovia Securities economists wrote in a research note.
"The roots of the slowdown are not that hard to find. Surging oil prices are taking a huge bite out of household purchasing power and corporate profits, leading to less spending and investment. Moreover, the bulk of the stimulus from the tax cuts has largely been played out and short-term interest rates have increased, pushing up interest rates on home equity lines and credit cards," they said.
But Stephen Auth at Federated Investments said the selloff may be overblown along with fears about oil prices, which he said will self-correct downward as the economy cools.
"Higher prices themselves are slowing demand for crude," he said, adding that "new supplies are likely to come on line later this year." Federated projects oil prices to average US$47 per barrel for this year, and drop to US$42 next year.
Based on this, Auth said he is "still looking for mid-to-high, single-digit returns" for the stock market, which would mean a strong rebound for the second half and a pattern similar to that of last year.
One reason for Auth's upbeat outlook is that he sees an end to the Fed rate hikes soon.
"The end could be in sight, given tame inflation and a slow-growth economy," Auth said.
"Typically, equities rally in anticipation of an end to Fed tightening," he said.
Bonds benefited from the shift out of stocks. The yield on the 10-year US Treasury bond fell to 3.914 percent from 4.078 percent a week earlier while that on the 30-year bond eased to 4.215 percent from 4.365 percent. Bond yields and prices move in opposite directions.
RSS