Stocks Falter as Oil Prices Climb

Stocks suffered their biggest pullback in nearly seven weeks Wednesday as crude oil prices jumped above $48 a barrel on renewed supply concerns.

But there was good news for the housing market as long-term Treasury bond yields fell to fresh five-month lows -- which could mean lower mortgage rates ahead.

On Wall Street, the Dow Jones industrial average slumped 135.75 points, or 1.3%, to 10,109.18, the largest percentage drop since Aug. 6.

Many broader market indexes dropped more sharply. The Nasdaq composite slid 35.47 points, or 1.9%, to 1,885.71.

One day after climbing to near three-month highs, stocks were tripped as oil prices threatened to top their record levels reached in mid-August.

Near-term crude futures in New York rose $1.59 to $48.35 a barrel after the government’s weekly report on U.S. oil inventories showed a drop of 9.1 million barrels, to 269.5 million, last week.

Analysts said the inventory decline reflected the effects of Hurricane Ivan in the Gulf of Mexico as the storm temporarily shut down some production and some foreign tankers were unable to unload oil.

The U.S. Energy Information Administration said it expected “a large increase in crude oil imports this week and, consequently, a substantial rise in crude oil inventories.”

Oil traders have been highly sensitive to supply data the last few months. Worries about Russian, Iraqi and Venezuelan oil production helped drive crude to a record $49.40 a barrel on Aug. 20.

The price then pulled back to $42.12 on Aug. 31, but it has risen in seven of the last eight sessions.

Wall Street had largely ignored oil’s rebound over the last week; investors pushed the Standard & Poor’s 500 index and other market gauges to near three-month highs by Tuesday.

But sellers took control of the market early Wednesday, egged on in part by a disappointing quarterly profit report from brokerage Morgan Stanley and by a weaker-than-expected profit forecast from FedEx.

“Those reports took the wind out of the market’s sails,” said Todd Clark, veteran trader at Wells Fargo Securities in San Francisco.

Share prices continued to ebb as the session wore on, and investors began to focus on the possibility of oil topping $50 a barrel soon, Clark said.

Falling stocks outnumbered winners by more than 2 to 1 on the New York Stock Exchange and on Nasdaq, in active trading.

The S&P; 500 index lost 15.74 points, or 1.4%, to 1,113.56.

All 30 stocks in the Dow fell Wednesday. Semiconductor, restaurant and transportation issues were particularly weak.

Some analysts said corporate earnings might be a more important issue than oil.

The economy’s recovery since 2002 has fed a boom in profits. But since July 1, 606 companies have warned that their third-quarter results would fall short of analysts’ expectations, according to earnings tracker Thomson First Call in Boston.

That is up 41% from the 430 companies that had warned about third-quarter results at this point a year ago.

On the positive side, Thomson said the number of companies saying that quarterly results would beat expectations is also up -- 297 versus 262 a year ago, a 13% rise.

Overall, companies in the S&P; 500 are expected to post third-quarter operating profit growth of 14.3% from a year earlier, Thomson said. That would be a respectable showing, many analysts say.

Still, the jump in disappointing profit forecasts has raised fears that the economy may not have regained as much steam as expected in recent months.

Tom McManus, investment strategist at Banc of America Securities in New York, suggested Tuesday that clients cut back on stock holdings. He cited “concerns regarding the sustainability of earnings growth.”

Other market pros have been willing to give stocks the benefit of the doubt in recent weeks, despite earnings jitters.

Wall Street has been helped in part by the view that the Federal Reserve soon may pause in its credit-tightening campaign, especially if the economy fails to show robust growth.

The Fed on Tuesday raised its key short-term rate from 1.5% to 1.75%, the third increase since June 30. Some economists believe that the Fed might go on hold after one more quarter-point rate hike in November or December.

That expectation also has helped to drive long-term bond yields lower since late August. The trend continued Wednesday, when the 10-year Treasury note yield slid to 3.98%, down from 4.04% on Tuesday and the first close below 4% since April 1.

The 10-year T-note is a benchmark for mortgage rates, so loan costs may be headed lower as well.

Bond buyers may be taking a bullish cue from oil, said Richard Gilhooly, bond strategist at BNP Paribas in New York.

Although investors’ first instinct might be to think of rising oil prices as inflationary, the reverse might be true, Gilhooly said: If energy costs soar, consumers may cut back spending on other goods, which could keep prices from rising in broad sectors of the economy.

That could make bonds more attractive by removing the threat that their fixed returns would be eroded by inflation.