The ongoing slump in the price of oil is starting to become a headache for the stock market.
On Monday, oil plunged, dipping below $50 for the first time in more than five years. The sharp drop prompted a big sell-off, not just in the energy sector, but across the entire stock market.
Stocks had already endured a weak open amid concerns that Greece could exit the euro, adding to worries about the poor outlook for growth in that region. As oil continued to slide, the losses deepened and the Standard & Poor's 500 index ended the day with its biggest loss in three months.
The price of oil has been falling since last summer amid mounting evidence that the world is oversupplied with the commodity after a surge in U.S. production. After six months of falling prices, investors are now getting jittery that the slump is attributable to more than just the supply glut; it could also be signaling a weakening global economy.
“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.
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 say that, on balance, a decline in oil prices is a boon for the broader 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.
Another area for concern is Europe.
Investors were already worried about the poor growth prospects in the euro region, and the impact that it would have on global growth. Now, they also have to contend with renewed speculation that Greece may exit the euro.
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 euro 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 currency 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.
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 they put some sideline cash to work,” said Wells Fargo's Wren.