Major U.S. stock indexes closed solidly lower

Major U.S. stock indexes closed solidly lower Wednesday as investors grappled with crude oil topping $123 per barrel for the first time and a mixed bag of economic reports. The spike in oil prices was depressing transportation issues along with the broader market. It occurred even though the Energy Dept. said crude and oil inventories rose in the U.S. last week.

Finance and homebuilding stocks were taking a hit from news of a 1% drop in the National Assn. of Realtors’ March index of pending home re-sales. Finance stocks also were affected by reports the SEC is scrutinizing the liquidity of investment banks it supervises.

Investors also weighed earnings reports from Disney (DIS) and Cisco Systems (CSCO), and news that Qatar Airways is seeking compensation from Boeing (BA) for delays in shipment of 787 aircraft.

Yahoo (YHOO) shares were lower amid indications Microsoft (MSFT) chairman Bill Gates was closing the door on a further offer to acquire the Internet portal.

There was little reaction to a report that nonfarm productivity rose by a more than expected 1.9% in the first quarter.

Bonds rose as stocks fell. Gold fell as the dollar index rose.

On Wednesday, the Dow Jones industrial average dropped 206.48 points, or 1.59%, to finish at 12,814.35. The broader S&P 500 index fell 24.90 points, or 1.76%, to close at 1,392.57. The tech-heavy Nasdaq composite index shed 44.82 points, or 1.79%, to end the session at 2,438.49.

Along with the Street's oil-fueled inflation worries, Wednesday's sell-off in the stock market reflects profit taking following big gains from the Apr. 15 lows, says S&P MarketScope.

After a brief holiday, volatility returned to the market Wednesday, with losses accelerating in the final hour. “The lack of any short covering by this late in the session indicates the bears are in firm control of the market,” said S&P technical analyst Chris Burba in a note.

“Ironically, the latest jump in oil prices has put stocks back under pressure and pulled [bond] yields down to session lows, despite the inflationary implications that continue to haunt the Fed,” says Action Economics.

The combination of oil prices approaching $124 per barrel and hawkish remarks on May 6 by Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, spurred renewed concerns among investors about the inflation risk and the likelihood that the Fed will have to raise interest rates to fight it, says Diane Dercher, chief economist at Waddell & Reed Financial in Overland Park, Kan.

“I think the market is perhaps overreacting to that risk as far as what the central bank’s reaction to inflation will be in near term,” she says. Fed Chairman Ben Bernanke said on Tuesday that he remains focused on the downside risk that the housing slump poses to the U.S. economy, which suggests he’s not close to raising rates anytime soon.

If anything, rising energy prices are acting to depress economic growth, putting a strain on consumers’ purchasing power but not being passed through to wages and not feeding the inflation wage price spiral, she says. The U.S. imports more than half of the oil it consumes and those imports increased to a record 3.24% of gross domestic product in the first quarter of 2008, surpassing the prior peak of 3.22% of GDP set in 1980, Dercher says. With oil prices now over $120, she thinks that will continue to impose a drag on economic growth and doesn’t see a risk of interest rates rising over the next six to 12 months.

(Bussiness Week)