By David S. Hilzenrath
Washington Post Staff Writer
Saturday, January 29, 2011; 12:41 AM
U.S. stocks declined sharply Friday as violent clashes in Egypt injected a jolt of anxiety into global financial markets.
The Standard & Poor's 500-stock index fell 1.8 percent to close at 1276.34, while the Dow Jones industrial average slid 1.4 percent to 11,823.70. The declines on Wall Street followed comparable losses in Asian and European markets.
Scenes of demonstrators challenging the government of Egypt, a strategic ally of the United States in the volatile Middle East, helped send oil prices 4.3 percent higher.
In a flight to safety, investors increased their purchases of U.S. Treasurys, pushing the yield on 10-year bonds down to 3.33 percent from 3.38 percent a day earlier. The price of bonds rises as the yield falls.
The stock market's retreat came as the Dow was on the verge of closing above 12,000 for the first time since June 2008. The Dow traded repeatedly above 12,000 earlier in the week only to fall short at the closing bell.
Egypt is central to U.S. interests in the Middle East as a moderate state and a key player in both counterterrorism operations and regional peace negotiations, said Helima L. Croft, a geopolitical analyst at Barclays Capital.
If street protests were to end President Hosni Mubarak's nearly 30-year hold on power, "I think there would be a fear that you could see radicalism sweeping across the Middle East," Croft said, adding that the fear might be unfounded.
Beyond its political significance, Egypt controls the Suez Canal, an important shipping lane.
Overseas, London's FTSE 100-stock index fell 1.4 percent Friday and Germany's DAX index fell 0.7 percent.
Daniel J. Cook, chief executive of IG Markets, said the stock market was gripped with uncertainty about the Egyptian upheaval, and often under such circumstances "the mentality is just take the profits that you've got" and sell.
Weeks ago, a flare-up of tensions on the Korean Peninsula caused a similar market shock, but that quickly faded, Cook noted.
New information about the U.S. economy also gave investors pause Friday. Economic growth sped up in the last three months of 2010, returning to its pre-recession level, the Commerce Department reported. But the 3.2 percent annual growth rate fell short of Wall Street expectations; analysts surveyed by Bloomberg had expected the economy to have grown at a rate of 3.5 percent.
Meanwhile, Ford reported an unexpectedly sharp decline in earnings during the last three months of 2010, sending its stock down 13.4 percent to close at $16.27.
Ford lost money in Europe, illustrating "cracks in the seams as it relates to the future growth prospects of some major markets," said Joseph Battipaglia, a market strategist at Stifel Nicolaus.
Even before the upheaval in Egypt, some investors and analysts thought the stock market was due for a downward correction.
Earnings updates from big companies had helped push the Dow to the brink of the 12,000 milestone. Companies such as IBM, Apple, Netflix and Caterpillar fueled the momentum with encouraging year-end reports or upbeat financial forecasts.
"Two years after the worst recession most of us have ever known, the stock market has come roaring back," President Obama was able to boast in his State of the Union Address on Tuesday.
The Dow, an index of 30 major U.S. companies, is still up more than 80 percent in less than two years, but it remains well below its pre-crisis peak.
It closed as high as 14,164.53 in October 2007 and subsequently as low as 6,547.05 in March 2009.