Stocks Slide on Oil’s Rise, Dollar’s Fall

Major stock indexes Wednesday suffered their biggest drop since spring, as a jump in oil prices, a sinking dollar and a desire to lock in profits from the summer rally triggered heavy selling.

Some analysts warned that the market, which has escaped a significant pullback over the last six months, might be seeing its luck run out in the short run.

“We’ve been due for some kind of giveback,” said Richard McCabe, chief market analyst at Merrill Lynch & Co. in New York.

Technology stocks, the leaders of this year’s rally, took the biggest hits Wednesday: The tech-dominated Nasdaq composite index slid 58.02 points, or 3.1%, to 1,843.70, its largest one-day loss since March 24.

The Standard & Poor’s 500 index fell 19.65 points, or 1.9%, to 1,009.38, its sharpest decline since May 19.

The Dow Jones industrial average’s drop wasn’t as severe -- it lost 150.53 points, or 1.6%, to 9,425.51 -- but there was no mistaking the day’s bearish tone.

Declining stocks outnumbered winners by about 2 to 1 on the New York Stock Exchange and on Nasdaq. Trading was active.

Stocks fell from the outset after the Organization of the Petroleum Exporting Countries surprised markets by ordering a cut in production. That drove crude oil prices up by more than $1 a barrel, and sparked concern that higher energy costs could slow the economy.

Another drop in the dollar’s value also unnerved some investors, by raising the risk that foreign investors might balk at buying U.S. securities. A weakening dollar devalues U.S. assets held by foreigners.

The buck’s latest slide began Monday, after the Group of 7 leading industrial nations announced that they would seek more “flexibility” in exchange rates. Analysts said the message was that the United States wanted the dollar’s value to decline, which could make American exports cheaper abroad, helping the nation’s ailing manufacturing sector.

The dollar tumbled Monday, stabilized Tuesday, then slid further Wednesday. It dropped to 111.44 yen in New York, down from 112.09 on Tuesday and near a three-year low.

The euro rallied to an eight-week high of $1.149 from $1.147 on Tuesday.

But analysts who worried that a weaker dollar would curb foreign investors’ appetite for U.S. bonds didn’t see evidence of that Wednesday: The Treasury saw robust demand at an auction of $25 billion in two-year notes, and foreign investors appeared to be big buyers, bond dealers said.

Overall, investors entered $2.20 in bids for every $1 in notes offered. By contrast, that so-called bid-to-cover ratio was a weaker 1.73 to 1 at a two-year T-note sale in August.

Buying of Treasury securities across the board drove yields lower Wednesday. The 10-year T-note yield, a benchmark for mortgage rates, fell to 4.13%, down from 4.21% Tuesday and the lowest since July 23.

The two-year notes were sold at a yield of 1.7%.

Some traders warned against reading too much into the Treasury bond rally, saying it was fueled, in part, as stocks tumbled and some investors looked to government bonds for their “haven” status.

Paul Calvetti, head of Treasury trading at Barclays Capital in New York, said some of the buying was by traders who had “shorted” bonds in recent days -- meaning they borrowed securities and sold them -- betting that the government’s need to finance the record federal budget deficit would put new upward pressure on yields.

As yields fell instead of rising, some short-sellers bought bonds to close out their bets, Calvetti said.

He said he still expected that a new round of weakness in the dollar would make foreign investors, particularly in Asia, reluctant to own U.S. bonds.

“I do think there’s going to be some selling by the Asians,” Calvetti said.

As for the stock market, a falling dollar could boost the prospects of many U.S. exporters. But investors don’t appear to be focusing on that at the moment.

Wednesday’s market drop was the third decline in the last four sessions. Though higher energy prices and the falling dollar gave investors reasons to sell, many analysts say Wall Street increasingly may be looking for any excuse to lock in profits.

The rally that began in mid-March has lifted the Dow industrials 25% and the Nasdaq composite 45%, with relatively few interruptions.

September historically has been the market’s weakest month, but so far Nasdaq is up 1.8% since Aug. 31 and the Dow is up fractionally.

As money managers and individual investors alike take inventory of their portfolios, they may feel compelled to sell some of their holdings to make sure that this year’s gains don’t all melt away, said Peter Boockvar, equity strategist at Miller Tabak & Co. in New York.

“I think a 10% to 15% pullback is quite possible now,” he said, adding “We need it” for the market’s longer-term health.

Merrill’s McCabe said the strong rally in stocks this month may have been the result of desperate money managers climbing aboard after prices failed to decline following another big gain in August.

“There was an emotional rush to buy,” McCabe said. “But now that’s gone.”

Taking a longer-term view, many market pros say investors who are betting that the economy’s recovery will continue in 2004 should be favoring stocks over bonds.

A stronger economy could push up interest rates, but for the stock market that could be offset by rising corporate earnings, said Jack Ablin, chief investment officer at Harris Trust & Savings Bank in Chicago.

A healthier economy “could be pretty ugly for bonds, but favorable for stocks,” he said.

Among Wednesday’s highlights:

* Retail stocks slumped on concerns that higher oil prices could hurt consumers’ purchasing power. Kohl’s slid $2.18 to $53.20, Wal-Mart lost $1 to $56.62 and Best Buy fell $2.21 to $48.50.

Asked about OPEC’s move, White House press secretary Scott McClellan said: “Certainly, sustainable economic growth is dependent on ample supplies of energy. Both producing and consuming countries alike have an interest in ample and affordable supplies of oil.”

But he added: “We believe that oil prices are best set by market forces.”

* Tech stocks falling sharply included Apple Computer, down $1.11 to $21.32; IBM, down $1.94 to $89.40; and KLA Tencor, down $2.76 to $52.99.

* Financial stocks were broadly lower. American International Group lost $1.78 to $58, and Goldman Sachs dropped $3.24 to $85.82.

* On the plus side, McDonald’s added 3 cents to $23.93 after raising its annual dividend 70%, to 40 cents a share. Home builder Lennar jumped $1.86 to $75.99 after raising its annual dividend to $1 a share from 5 cents.

* Energy stocks were mostly higher. Murphy Oil jumped $2.34 to $59.83, Apache was up 99 cents to $69.09 and BP gained 40 cents to $42.65. But Exxon Mobil eased 16 cents to $36.90.

* Gold hit a fresh seven-year high, up $1.60 to $387.50 an ounce.

*

Times staff writer Maura Reynolds in Washington contributed to this report.