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Stocks Reel From Fresh Fears

Posted on: Friday, 5 September 2008, 06:00 CDT

By Adam Shell

A steep drop in the price of oil and other commodities may not be as bullish for stocks as Wall Street pundits had originally envisioned.

The reason: Investors fear that crashing oil, coal and platinum prices signal something far more sinister: a sharp business slowdown abroad that could crimp the economy here and hamper U.S. corporate profits.

Those fresh worries Thursday sparked the worst stock sell-off since June 26, pushing all major stock indexes more than 20% below their October highs and back in bear-market territory. The Dow Jones industrials fell 345 points, or 3%, to 11,188.

"The reason for the sell-off is simple: You have commodities crashing, and that is signifying a global slowdown in economic growth," says Gary Kaltbaum, president of Kaltbaum & Associates.

Economic weakness in Europe, China and once-booming emerging markets spells trouble for U.S. companies, which have gotten a large chunk of their recent earnings growth from abroad, says Timothy Vick, portfolio manager at Sanibel Captiva Trust. "More and more foreign economies are starting to slow," he says. "And that is taking out a strong leg of our economy."

More signs of economic distress in the U.S. came to light Thursday. Retail sales for August were underwhelming. The outlook for jobs also darkened as the government reported a larger-than-expected rise in the number of laid-off workers filing for unemployment benefits. Similarly, the ADP Employer Services report showed 33,000 jobs were cut by private employers in August.

The U.S. economy is struggling from the housing bust, credit crunch and weak jobs market.

Stocks were unable to gain traction despite oil falling $1.46 to $107.89, 26% below its July high.

Alec Young, an equity strategist at Standard & Poor's, says stocks have already gotten the boost from lower oil prices. The problem, he says, is that about 17% of the S&P 500-stock index is made up of energy and commodity stocks. As a result, any benefit to companies that profit from lower oil prices is offset to some degree by sharp drops in the prices of firms that sell energy and other commodities.

The overall earnings of the S&P 500 could be hurt if lower energy prices persist and profits shrink at energy companies. Profit growth of 0.9% is expected for the overall index in the third quarter. But if you take out energy, profits would drop 9.6%, says Thomson Reuters.

Investors are also confronted with seasonal headwinds. September is historically the worst month for stocks, notes Joseph Williams, director of equities at Commerce Trust Co.

Source: USA TODAY

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