For weeks, the stock market held firm in the face of soaring oil prices, surprising traders who expected a collapse. On Thursday and Friday of this week, that collapse finally arrived, courtesy of crude threatening to close above $60 a barrel.
After dropping 166.49 points on Thursday, the Dow Jones industrial average of 30 blue chip stocks fell 123.60 points more, or 1.19 percent, on Friday to close at 10,297.84.
The broader market also suffered as the Standard & Poor's 500-stock index lost 9.16 points on Friday, or 0.76 percent, to close at 1191.57. The technology-heavy Nasdaq Stock Market index dropped 17.39 points, or 0.84 percent, to close at 2053.27.
For the week, the Dow dropped 3.06 percent, the S&P 500 2.09 percent and the Nasdaq 1.76 percent. It was the worst weekly decline for all three indexes since April, and money managers and traders uniformly laid the blame on energy prices.
"The leading candidate is oil for sure," said Dan McMahon, head of listed trading at CIBC World Markets. "I don't really think there is that big a difference between oil at $57 and oil at $60, but $60 is pretty important psychologically. People wonder if it gets through $60, how high is it going to go?" After briefly breaking though $60 on Thursday, a barrel of light, sweet crude oil closed at $59.84 in New York trading Friday, up 42 cents to another in a series of record highs.
While the price of oil is still below its all-time peak when adjusted for inflation, investors appear increasingly worried that high gas prices will cut into both consumer spending and corporate profits, slowing the U.S. economy.
McMahon said that in addition to rising oil prices, the market lacks any real catalyst to go higher and probably will not get one until a large number of companies report quarterly earnings figures in the next few weeks. "It's partly the typical summer doldrums," he said. "But people are also asking, 'Why should I be a buyer here?' "
Traders and money managers also digested a Commerce Department report showing that while the number of new home sales rose 2.1 percent, the median price for new homes dropped 6.5 percent to $217,000.
Booming home prices have been a key underpinning of the U.S. economy, with low-interest home equity loans pumping easy cash into consumers' pockets. Any sign that the real estate market is cooling off makes stock market investors nervous. The Commerce Department also reported that excluding transportation equipment, U.S. orders for durable goods dropped 0.2 percent. Economists surveyed by Bloomberg News had been expecting a 0.5 percent increase.
Concern over the state of the economy continues to be reflected in the Treasury market, where investors seek out the safety of government bonds. The 10-year Treasury note rose $2.81 per $1,000 in face value on Friday while its yield, which moves in the opposite direction of price, dropped to 3.92 percent.
Traders and money managers said oil prices will continue to dictate market movement next week and few see prices easing much, if at all.
"Those who think that energy prices are headed back into the $30's are dreaming," David Kotok, chief investment officer at Cumberland Advisors, wrote in a recent note to clients. "A $50-$60 trading range for oil is more likely to be a plateau on the way to even higher prices. Demand for energy is rising unabated."
Alcoa, an aluminum producer that serves as a bellwether for industrial stocks, dropped 73 cents, or 2.7 percent, to close at $26.46 on Friday, a day after the company said it would cut 6,500 jobs.
Guidant, a medical device maker, dropped $4.70, or 6.9 percent, to close at $63.90 after the company issued a warning to doctors not to install five of its defibrillators because they could malfunction.
Home Depot dropped 90 cents, or 2.3 percent, to close at $38.24.
New York Stock Exchange composite index fell 37.49, to 7209.06.
American Stock Exchange index fell 5.19, to 1531.52.
Russell 2000 index of smaller-company stocks fell 3.71, to 630.41.
NYSE: 2.49 billion shares, up from 2.02 billion on Thursday. Decliners outnumbered advancers 8 to 5.
Nasdaq: 2.27 billion shares, up from 2.03 billion. Decliners outnumbered advancers 3 to 2.
Crude oil for August delivery: $59.84, up 42 cents.
Gold for current delivery: $440.50 a troy ounce, down from $441.70 on Thursday.