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Wall Street buckles under pressure from energy prices

Wall Street buckled under pressure from persistent high energy prices over the past week as investors assessed the risks of sky-high oil prices on the economy and the stock market.

The Dow Jones Industrial Average fell 0.39 percent for the week to end Friday at 10,559.23 and the broad-market Standard and Poor's 500 index shed 0.87 percent to 1,219.71. The NASDAQ tech-heavy composite shed 0.98 percent for week to 2,135.56.

Although crude oil futures have retreated from their peak above US$67 earlier this month, prices remain near record levels, closing the week at US$65.35 a barrel in New York.

Inflationary pressures appeared to spread as well. The government reported a surprisingly strong 1.0 percent gain in July wholesale prices, led by higher energy and auto prices. Even without food and energy, these costs were up 0.4 percent.

Consumer prices meanwhile rose 0.4 percent with the core rate up 0.2 percent.

Joel Naroff of Naroff Economics said that tough competition is preventing a pass-through of higher prices to consumers but that this is only squeezing companies further.

"While the investors may think inflation ... it's earnings that are really the worry," he said.

The world's largest economy has weathered the rise in energy costs so far, but analysts wonder how long this will last. Warning signs are on the rise, including one from retail giant Wal-Mart that high fuel prices may be pinching its consumers and cutting into their spending on other items.

"When you add up household interest payments and energy costs together, they now absorb 19.1 percent of personal disposable income," said Merrill Lynch analyst David Rosenberg.

"That's a drain from cash flow of nearly US$100 billion," he said.

Citigroup economist Robert DiClemente voiced similar concerns, saying the pace of economic growth is likely to fade.

"The direct fallout of higher energy costs whether for crude, gasoline, heating oil, natural gas or electricity, along with the impact on sentiment, especially among businesses, will determine the degree to which activity moderates," he said.

"On balance, it would not be surprising to see GDP growth drop slightly below 3.0 percent for a quarter or two," DiClemente said.

David Briggs at Federated Investments said the market may be ready for a pause after a bull run that began in March 2003.

"Bull markets don't move up in a straight line," he said. "They are punctuated by occasional pullbacks."

But Briggs said he does not believe the uptrend is over.

"The economy looks reasonably strong, especially for this point in the business cycle," he said. "GDP grew by 3.4 percent in the second quarter, the Federal Reserve doesn't seem especially worried about inflation, and interest rates remain low. Given that backdrop, we think there could be an additional upleg in store before the end of 2005."

Bonds gained over the past week. The yield on the 10-year US Treasury bond fell to 4.211 percent from 4.238 percent a week earlier and that on the 30-year bond eased to 4.421 percent against 4.441 percent. Bond yields and prices move in opposite directions.
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