Friday June 6, 12:01 pm ET
By Tim Paradis, AP Business Writer
Stocks tumble after surge in crude oil prices, suprise jump in unemployment rate; bonds jump
NEW YORK (AP) -- Wall Street plunged Friday on two troubling economic developments: oil prices that surged more than $6 a barrel and a jump in unemployment that was much larger than the market anticipated. The Dow Jones industrial average gave up more than 250 points.
The decline in stocks also helped drive bond prices sharply higher as investors sought a more secure place for their money.
Crude oil has made an aggressive rebound this week, rising more than $7 a barrel in two days after falling amid a drop in demand for gasoline. The jump continued Friday. Light, sweet crude surged $6.37 to $134.16 a barrel on the New York Mercantile Exchange after reports that a Morgan Stanley shipping analyst predicted oil would surge to $150 a barrel by July 4 and as the dollar declined.
Oil's advance unnerved a market already anxious about consumers' willingness to spend; the higher that energy costs go, the more difficult it will become for consumers to justify spending on things that aren't necessities. That kind of reluctance could deal a big blow to the economy as consumer spending accounts for more than two-thirds of U.S. economic activity.
The spike in energy prices comes as the Labor Department said the nation's unemployment rate jumped to 5.5 percent in May from 5.0 percent in April. It was the biggest monthly increase since February 1986 and the rise leaves unemployment at it highest level since October 2004. Wall Street had predicted an uptick to 5.1 percent.
The number of U.S. jobs shrank by a smaller-than-expected 49,000, but that development offered Wall Street little solace given that May marked the fifth straight month of jobs losses. Signs that the U.S. job market is deteriorating more than anticipated could thwart investors' hopes that the economy is poised for recovery later this year. That notion has helped propel the stock market from its mid-March lows.
The sudden rise in oil prices appeared to weigh most heavily on Wall Street, however, as some investors attributed a portion of the rise in unemployment to a rush of teenagers looking for summer work.
"I think the biggest concern right now is oil and it's potential for a stagflationary environment," said Bill Knapp, investment strategist for MainStay Investments, a division of New York Life Investment Management. Stagflation occurs when stalling growth accompanies rising prices.
In midday trading, the Dow fell 252.81, or 2.01 percent, to 12,351.64.
Broader stock indicators also declined. The Standard & Poor's 500 index fell 23.87, or 1.70 percent, to 1,380.18, and the Nasdaq composite index fell 42.16, or 1.65 percent, to 2,507.78.
Friday's pullback comes a day after the Dow jumped nearly 214 points, logging its largest daily point gain since April 18 following better-than-expected sales from retailers and a dip in jobless claims. The welcome economic news helped investors shrug off a more than $5-a-barrel spike in oil prices. But the further advance in oil on Friday was too much for investors to overlook.
Bond prices jumped after the weak jobs data sent investors scurrying for safety. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.94 percent from 4.04 percent late Wednesday.
The dollar declined against other major currencies -- a move that makes each barrel of oil more expensive. Gold prices rose.
Ethan Harris, Lehman Brothers' chief U.S. economist, contends that the employment report helped drive oil prices higher. He said traders are worried that the spike in unemployment would leave the Federal Reserve unwilling to raise interest rates. A notion of a Fed with few options combined with comments from the European Central Bank this week on the possibility of raising rates have hurt the dollar.
"The weaker dollar is pushing up oil prices because oil is denominated in dollars and oil sellers want to be compensated for the weaker dollar," Harris said, adding that he thinks the market's moves have been overdone.
"While I'm skeptical of the whole thing in terms of whether it makes sense logically, this is the way the market behaves. It's like a Pavlovian response. If the Fed looks soft, oil prices go up," he said.
Declining issues outnumbered advancers by about 4 to 1 on the New York Stock Exchange, where volume came 523.4 million shares.
The Russell 2000 index of smaller companies fell 13.47, or 1.76 percent, to 749.80.
Wall Street's pullback weighed on Europe. Britain's FTSE 100 fell 1.48 percent, Germany's DAX index fell 1.99 percent, and France's CAC-40 declined 2.28 percent. Japan's Nikkei stock average closed up 1.03 percent.
