Jan 5, 2015 6:07 PM
Stocks plunge on fears about implications of oil slump
The Associated Press
NEW YORK (AP) After six months of falling oil prices, investors are starting to worry that the prolonged slump is signaling a weaker global economy.
That fear shook financial markets Monday as oil plunged again, dipping below $50 for the first time in more than five years and triggering a big sell-off, not just among energy stocks but across the entire stock market.
Stocks had already endured a weak opening because of concerns that Greece could leave the eurozone, adding to worries about the poor outlook for growth in that region. As oil slid further, the selling accelerated, pushing the Standard & Poor's 500 index to its biggest loss in months.
QUESTIONS ABOUT RECOVERY
Since the decline began, investors have been working on the assumption that lower oil prices, caused by a glut in supply, will be a boon to the U.S. economy. On Monday, that thesis was discarded as prices plunged further and investors started to fret about the wider implications of the drop.
"The lower that oil prices go, the more it reinforces into the market's mind that perhaps this is more of a demand issue than a supply issue," said Burt White, chief investment officer at LPL Financial. That raises questions "about the robustness of this recovery."
The S&P 500 index dropped 37.62 points, or 1.8 percent, to 2,020.58. That was the biggest one-day slump for the index since Oct. 9. The Dow Jones industrial average fell 331.34 points, or 1.9 percent, to 17,501.65. The Nasdaq composite fell 74.24 points, or 1.6 percent, to 4,652.57.
ENERGY COMPANIES LEAD BROAD SELL-OFF
Energy stocks led the drop, plunging 4 percent, as the price of oil closed down $2.65 at $50.04 a barrel, after dipping below $50 during trading. But the declines were broad, and even airline stocks, usually a beneficiary of lower oil prices, ended the day lower.
Most analysts and economists predict that, on balance, a decline in oil prices helps the wider economy because it reduces energy costs for industrial companies. Lower gas prices also put more money in the pockets of consumers.
But there are downsides as well. As the price of oil slumps, some companies in the energy industry will go out of business. Not only will that cost jobs in the sector, but it will also cut spending on things like plants and equipment.
Transocean, a company that provides offshore drilling services to oil companies, was among the biggest decliners in the S&P 500 index on Monday. The company's stock slumped $1.28, or 7.1 percent, to $16.84.
WORRIES ABOUT EUROPE
Another area for concern is Europe.
Investors were already worried about the poor growth prospects in the euro region and the impact on global growth. Now they also have to contend with renewed speculation that Greece may withdraw from the eurozone.
European stock markets slumped, and the euro plunged against the dollar on reports that German Chancellor Angela Merkel no longer believes it would be too risky for the 19-member eurozone if Greece dropped out of the currency bloc. Elections in Greece this month could be won by the Syriza party, which wants to renegotiate the terms of the country's international bailout, threatening its place in the euro group.
The currency was already under pressure from expectations that the European Central Bank will expand its monetary stimulus as the region's economy struggles.
On Monday, the euro was trading at $1.1939 after falling to a five-year low of $1.1862.
The outlook for economic growth in Europe and other regions matters to companies in the U.S., as nearly half the sales from S&P 500 companies are generated outside of the U.S.
"Our companies do a lot of business with Europe, we sell a lot of goods and services there," said Scott Wren, senior global equity strategist at the Wells Fargo Investment Institute. "Anything that hurts consumer confidence and business in Europe is going to hurt economic growth."
In U.S. government bond trading, prices rose as investors moved to buy the safest assets. The yield on the benchmark 10-year Treasury note, which falls when prices rise, dropped to 2.04 percent.
GROWTH FORESEEN FOR U.S. MARKET
Despite the increase in volatility, analysts are still confident in the outlook for growth in the U.S. and believe that the stock market will hand investors positive returns this year. Some even recommend adding to stock holdings when prices fall.
Just one week ago, the S&P 500 index closed at an all-time high of 2,090.57. The energy sector aside, company earnings should remain strong, and the economy is still growing. Last quarter the U.S. economy expanded at an annual rate of 5 percent.
"When you get some pullbacks, we'll definitely be pounding the table recommending that (our clients) put some sideline cash to work," Wren said.
In metals trading, prices for precious and industrial metals ended mixed. Gold rose $17.80 to $1,204 an ounce, silver rose 45 cents to $16.21 an ounce and copper fell five cents to $2.77 a pound.
In other energy trading, Brent crude, a benchmark for international oils used by many U.S. refineries, fell $3.31, or 5.9 percent, to close at $53.11 a barrel in London.
In other futures trading on the NYMEX:
Wholesale gasoline fell 5.2 cents to $1.381 a gallon.
Heating oil fell 4.7 cents to close at $1.749 a gallon.
Natural gas fell 12.1 cents to close at $2.882 per 1,000 cubic feet.