Stocks Tumble as Oil Hits $100

Crude briefly hit the century mark Wednesday, marking an unhappy start to 2008 for Wall Street

by Ben Steverman

Oil at $100 per barrel. Manufacturing activity at the lowest level in almost four years. A 200-plus point decline in the Dow industrials.

Happy New Year!

On Wednesday, the first trading day of 2008, the Dow Jones industrial average fell 220.86 points, or 1.67%, to 13,043.96. The broader S&P 500 index dropped 21.20 points, or 1.44%, to 1,447.16. The tech-heavy Nasdaq composite index lost 42.65 points, or 1.61%, to 2,609.63.

After surging 57% in 2007, February NYMEX crude oil hit $100 shortly after noon and then retreated a bit. Oil ended the day up $3.64 to a record close of $99.62 per barrel.

A variety of events coincided to push oil above the key psychological barrier on Wednesday, analysts and traders said. Those included violence in Nigeria, a postponement of elections in Pakistan and a fall in the U.S. dollar due to the weak manufacturing data.

However, the main long-term driver is growing demand and weak supply, says Evan Smith, a portfolio manager of U.S. Global Investors' Global Resources Fund (PSPFX). Demand has come from fast-growing China, India and other emerging economies, while at the same time producers have had unexpected difficulty bringing large new oil supplies onto the market. "The longer-term trend has been upwards and we don't see anything that's going to break that trend," Smith says.

Economists worried the symbolism of $100 oil could unnerve American consumers. "The rise in oil prices foreshadows higher prices at the pump," wrote Ryan Sweet, economist at Moody's Economy.com. "This will put an enormous strain on household finances at a time when consumer fallout from the housing bust is peaking and the job market is at its weakest in several years."

The U.S. ISM manufacturing index showed weakness by dropping to 47.7 in December, the weakest reading since April 2003, from 50.8 the previous month. The number is worse than expected, and weaker than other recent manufacturing data.

"This report suggests that manufacturing activity contracted significantly in December and overall economic growth slowed sharply," said Bear Stearns economist John Ryding, who wrote the data could keep the Federal Reserve on track for an interest rate cut later this month.

Worries about the U.S. economy hurt the U.S. dollar. The euro rose 0.9% against the dollar to $1.4724, while gold surged 2.63% to $860 per ounce.

Investors put behind them a largely successful, if volatile, 2007. For all of last year, the Dow was up 6.4%, the S&P 500 rose 3.53% and the Nasdaq composite was up 9.8%.

That was the fifth positive year in a row for the S&P 500, a key benchmark designed to reflect the overall U.S. economy. In 2006, the index was up 12.8%, following a 3.01% gain in 2005, a 9% advance in 2004 and a 26.4% gain in 2003. The S&P 500 experienced three years of losses from 2000 to 2002.

In other economic news Wednesday, U.S. construction spending moved up 0.1% in November, from a 0.4% drop in October. Residential construction fell 2.4% in November, but nonresidential construction rose 2.1%.

The ICSC UBS chain store sales index report, released Wednesday, fell 0.2% in the week ended Dec. 29 after rising 2.8% the week before. Last-minute shopping and gift card redemptions were strong, the report said.

Traders also were poring over minutes from last month's Federal Reserve meeting, looking for clues to how policymakers set interest rates in 2008. The minutes noted "the situation was quite fluid and the economic outlook unusually uncertain." It added, "Financial stresses could increase further," warranting more rate cuts, but "members also recognized that financial market conditions might improve more rapidly than members expected," making a "reversal of some of the rate cuts" appropriate.

This week's calendar also includes initial jobless claims on Thursday; and on Friday, the closely watched December employment report.