Stocks End Lower as Oil Hits $100

A surge in commodity prices derailed the market's advance Tuesday and raised fresh questions about the economy's health

Equity investors may have been able to shrug off more problems in the banking sector Tuesday, but a spike in oil prices to $100 per barrel knocked the wind out of the stock market. The fresh rise in crude was a sobering reminder that the credit crunch and housing slump aren’t the only factors threatening to hinder U.S. economic growth.

Major U.S. stock indexes closed lower on Tuesday, as a broad-based rally in commodities such as oil, metals and agricultural products siphoned off interest from equities. Earlier in the day, stocks had benefited from a strong earnings report by leading retailer Wal-Mart Stores (WMT) and progress made by the largest bond insurers toward restructuring their operations, which overshadowed an admission by Credit Suisse Group (CS) that it overvalued its mortgage-backed securities by $2.85 billion.

On Tuesday, the Dow Jones industrial average finished 10.99 points, or 0.09%, lower at 12,337.22. The broader S&P 500 index edged down 1.21 points, or 0.09%, to 1,348.78. The tech-heavy Nasdaq composite index shed 15.60 points, or 0.67%, to trade at 2,306.20.

Profit-taking wiped out earlier stock gains, especially among the technology names listed on Nasdaq, with Google (GOOG), Yahoo (YHOO), Onyx Pharmaceuticals (CS) and Given Imaging (GIVN) leading the retreat.

On the New York Stock Exchange, 18 stocks traded lower for every 14 showing gains, while on the Nasdaq the ratio was 16-14 negative.

Oil prices extended their four-day rally on deepening supply concerns after Alon USA's Big Spring refinery in Texas was shut down by a fire on Monday. Then, just before 2:30 p.m. ET, the March crude futures contract touched $100 per barrel for the third time in less than two months, settling at $100.01. The immediate catalyst was reported to be threats of violence by Nigerian rebels that could interrupt production at a time when traders fear OPEC may decide to cut output at its next meeting on March 5.

But the spike in oil prices is part of a resurgence in strength across all commodities, which is all the more surprising to some economists who have predicted a U.S. recession is on the way if not already in effect. Metal prices have also surged in recent days, led by platinum, spurred by supply concerns amid production disruptions caused by power outages in South Africa.

"What’s odd about it is we can see all sorts of [signs of a] slowdown in the economy, and a slower economy is supposed to relieve upward price pressure on commodities. That just doesn’t seem to be happening," said Douglas Peta, market strategist at Seligman & Co. in New York.

The best explanation for that would seem to be greater demand for all kinds of commodities in developing countries such as China and India, he said.

China's latest economic plan calls for ramping up spending on infrastructure to $1.0 trillion over the next five years, while India will increase its infrastructure budget by 130% over the same time period, said Frank Holmes, a commodities fund manager at U.S. Global Investors in San Antonio, Texas.

"When you have 40% of the world’s population come out with government policies mandating an increase in spending, this is a catalyst" for commodity price gains," Holmes said. "The commodity component is not as detrimental to the cost of an infrastructure project as it is in North America," where labor costs are already much higher.

After the crippling snow storms in China during the lunar new year celebrations, the Chinese government, which had planned to pull back on lending in order to cool down the economy, decided to "open the spigots" on infrastructure spending, Holmes said. New expressways account for 24% of the latest infrastructure budget, while railways account for 22% and power generation 34% of the budget, he said.