Uncertainty Returns to the Street

Wall Street, which was running out of things to worry about just three weeks ago, starts this week with its anxiety meter back in the red zone.

Blue-chip stock indexes Friday suffered their biggest declines in more than two years as oil prices neared record highs and as fourth-quarter reports from General Electric Co. and Citigroup Inc. fanned concerns about slowing earnings growth.

This week, energy prices again are likely to hold sway over investor sentiment, and ditto for earnings as profit-reporting season reaches its zenith.

The impending leadership change at the Federal Reserve, as Chairman Alan Greenspan retires in nine days, also could weigh on Wall Street.

Stock markets worldwide may be in the process of shaking off what some pros say has been a dangerous level of complacency -- a feeling that the risk of loss in equities was minimal.

“Investors had super-high expectations at the start of the year,” said Michael Panzner, head of trading at Rabo Securities in New York. Friday’s sell-off, he said, may mark the beginning of more sober pricing of many stocks to reflect the risks facing the economy and companies.

The blue-chip Standard & Poor’s 500 index slumped 23.55 points, or 1.8%, to 1,261.49 on Friday, its biggest one-day percentage loss since September 2003. The Dow Jones industrial average dropped 213.32 points, or 2%, to 10,667.39.

U.S. stocks had held up relatively well for most of last week, even as shares weakened in many foreign markets that had sharply outperformed Wall Street in 2005, and despite a new threat Thursday from Al Qaeda leader Osama bin Laden.

On Friday, however, sellers suddenly took over the U.S. market. One catalyst was a jump of $1.52 in crude oil futures prices, to end the day at $68.35 a barrel in New York, the highest closing price since Sept. 1. That left oil a mere 2% below the record high of $69.81 set Aug. 30, after Hurricane Katrina hit the Gulf Coast.

Oil prices have been rebounding since late December amid fresh fears over tight global supplies. Energy facilities in Nigeria, a major crude supplier, have come under attack from militants in recent weeks. And demands by the U.S. and its allies that Iran abandon its nuclear research program have raised the specter of a cutoff of oil exports from that country.

Some investors also were quick to dump blue-chip shares Friday after GE and Citigroup reported fourth-quarter earnings that were less robust than expected.

The complete mood change from Thursday (when the Dow rose about 26 points) to Friday surprised many analysts.

“It was as if the two sessions were in different decades,” said Steve Todd, editor of the Todd Market Forecast investing newsletter in Crestline.

At the start of the year, investors worldwide were pouring money into stocks, implying a high level of confidence in global economic growth and in corporate earnings growth in 2006. The Dow closed above 11,000 on Jan. 9, the first time it had topped that mark since 2001.

Many investors were responding to signs from the Federal Reserve that its 18-month-long credit-tightening campaign soon might be over. The minutes of the central bank’s mid-December meeting, made public Jan. 3, said that most Fed members believed that the number of additional interest rate hikes “probably would not be large.”

Policymakers also made clear that “future action would depend on the incoming data” about the economy.

A number of reports this week could show whether the economy in December was decelerating faster than many analysts had assumed.

December data due this week include existing-home sales (Wednesday) and durable-goods orders (Thursday). On Friday the government will give its first estimate of fourth-quarter gross domestic product growth. Analysts’ consensus estimate is that GDP rose at a 2.8% real annualized rate in the quarter, down from 4.1% in the third quarter.

A broad swath of companies will issue fourth-quarter earnings this week. Of the 95 companies in the S&P; 500 that reported results through Friday, most have beaten expectations, despite the high-profile disappointments at GE, Citigroup, Intel Corp. and some other companies, according to data tracker Thomson Financial.

The problem may be that investors aren’t seeing the same level of positive surprises they had gotten used to in recent years. Through Friday, 58% of S&P; companies had beaten analysts’ consensus estimates for the fourth quarter, down from an average of 67% over the prior eight quarters, Thomson said.

If this week’s economic and profit reports are weaker than expected, or if oil prices continue to climb, investors may lose more of the confidence they’ve had about growth in the economy and in corporate earnings this year. That could fuel more selling in the stock market.

The flip side is that disappointing economic data and higher oil prices could bolster expectations that the Fed is nearly done raising interest rates, said John Lonski, economist at Moody’s Investors Service in New York.

If there’s bad news between now and Jan. 31, the final Fed meeting to be chaired by Alan Greenspan, the Fed “just might leave [its key rate] at the current 4.25%,” Lonski said.

But the Fed chairmanship change from Greenspan to Ben S. Bernanke, who is expected to be confirmed by the Senate on Jan. 31, also could raise more uncertainty for investors near term.

Some analysts say stock markets worldwide could just be setting up for a classic bull-market correction, meaning a pullback of 10% or so from recent highs.

If so, there’s still a lot of downside to go: The Dow, the S&P; 500 and the technology-heavy Nasdaq composite all hit multi-year highs Jan. 11. Since then, the Dow is down 3.4%, the S&P; 500 is down 2.5% and the Nasdaq is off 3.6%.

And because there hasn’t been a 10% pullback in the S&P; in three years, one risk is that a decline of that magnitude quickly could turn more severe by unleashing pent-up selling, said Rabo Securities’ Panzner.