Oil Prices Ignite Wall Street Sell-Off
Evidence that high oil prices were stoking inflation and cutting into corporate earnings ignited a broad sell-off Tuesday on Wall Street, slamming the Dow Jones industrial average to a 120-point loss.
The consumer price index for July came in at a higher-than-expected 0.5%, fueled in part by soaring energy costs, the government reported. Economists had expected a 0.4% increase.
Shares of Wal-Mart Stores weighed on the Dow after the retail giant warned that its profit this quarter would come in lighter than expected, partly because rising gasoline costs were crimping consumer spending. Prices at the pump are up about 36% in the last year, according to AAA.
“The market is really gun-shy because of the run-up in oil prices,” said Gary Schlossberg, senior economist at Wells Capital Management in San Francisco. “There’s a sense of foreboding as oil continues to rise.”
After reaching record highs last week, near-term crude oil futures eased Tuesday for the second straight session but remained above $66 a barrel, sliding 19 cents to $66.08 on the New York Mercantile Exchange.
On Wall Street, retailers Home Depot and J.C. Penney slumped despite strong profit reports, while earnings warnings from farm equipment maker Deere and others heightened concerns about the health of the U.S. economy.
In a sell-off that gained steam late in the day, the Dow sank 120.93 points, or 1.1%, to 10,513.45, and the broader Standard & Poor’s 500 index slid 14.53 points, or 1.2%, to 1,219.34, its biggest drop since April 20. The technology-heavy Nasdaq composite lost 29.98 points, or 1.4%, to 2,137.06.
Losers swamped winners by nearly 5 to 2 on the New York Stock Exchange and by almost 3 to 1 on Nasdaq. Volume was moderate.
Treasury yields fell as the weakness on Wall Street sent investors into fixed-income securities. Bond yields move in the opposite direction from their prices. The yield on the benchmark 10-year T-note eased to 4.21% from 4.29% on Monday.
In currency trading, the dollar strengthened against the euro and the Japanese yen. The dollar fetched 109.50 yen, up from 109.28 on Monday, while the euro fell to $1.235 from $1.236.
Prices paid by consumers last month posted their biggest jump since April, the Labor Department said, raising the specter of higher inflation.
Excluding the volatile energy and food categories, consumer prices climbed just 0.1% in July, compared with expectations of a 0.2% rise, but investors focused on the overall number of 0.5%. With oil prices up sharply this year, the inflationary effect of energy costs was hard to ignore.
The data bolstered the view among economists that the Federal Reserve was likely to continue raising interest rates through the rest of the year.
“There are three risks to the stock market right now: higher interest rates, rising oil prices and a housing slowdown,” said Doug Fabian, editor of the Successful Investing newsletter in Huntington Beach.
“Whether they are enough to bring the economy to a halt, we’re going to find out in the weeks and months ahead,” he added.
Wal-Mart fell $1.53 to $47.57 after saying it expected full-year earnings of $2.63 to $2.70 a share. In May, it forecast profit of as much as $2.74 a share.
Shares of J.C. Penney and Home Depot were sold off even after the retailers posted better-than-expected results, as Wal-Mart’s outlook cast a pall over the retail sector.
J.C. Penney sagged $2.16 to $49.74 although it exceeded second-quarter profit estimates and raised its targets for the current fiscal year.
Home Depot dropped 94 cents to $40.67 after it beat second-quarter earnings estimates. The company bumped up its full-year profit guidance but kept revenue targets steady.
Among other retailers, Dick’s Sporting Goods tumbled $6.33 to $32.90 and clothing seller American Eagle Outfitters skidded $2.84 to $27.88 after they issued cautious profit forecasts.
In other highlights:
* Deere plunged $8.18 to $64.63 after it lowered its outlook for the year, citing Midwest drought conditions that had hurt farmers. Other makers of heavy equipment fell, including Caterpillar, which lost $1.57 to $53.69.
* Gateway fell 78 cents to $3.11 after the computer maker said its profit this year would be eroded by price competition and steeper component costs.
* Estee Lauder surged $3.40 to $40.80 after the cosmetics maker reported better-than-anticipated quarterly earnings.
* Goodyear Tire & Rubber slipped 60 cents to $16.91 after it said the Securities and Exchange Commission was prepared to sue the company over accounting irregularities.
