Record Oil Prices Stifle Stocks’ Early Advance

Oil prices that soared to $65 a barrel choked off an early rally Wednesday on Wall Street, pummeling the market’s optimism about the economy in the process. The tech-focused Nasdaq composite index also was hurt by a disappointing forecast from computer networking giant Cisco Systems.

Analysts said investors had begun the day confident that the U.S. economy would stay strong, absorbing both higher short-term interest rates and rising gasoline prices. But the erosion of stocks’ early advance -- the Dow Jones industrials had gained more than 100 points, extending a rally from Tuesday -- was proof that many investors remained uneasy and inclined to sell when oil climbed higher.

Crude hit an intraday record of $65 a barrel on the New York Mercantile Exchange before easing to a record close of $64.90, up $1.83 for the day.

The price of oil “clearly is the headline, and that’s probably causing the market malaise,” said Jack A. Ablin, chief investment officer at Harris Private Bank in Chicago.

The Dow ended with a loss of 21.26 points, or 0.2%, at 10,594.41.

In heavy trading, broader stock indicators also finished lower after being up for much of the session. The Standard & Poor’s 500 fell 2.25 points, or 0.2%, to 1,229.13 and the Nasdaq composite dropped 16.38 points, or 0.8%, to 2,157.81.

Even so, winners outnumbered losers on the New York Stock Exchange by 4 to 3.

The market initially was buoyed by confidence that the economy could handle the Federal Reserve’s steady credit-tightening campaign. The Fed on Tuesday raised its key rate to 3.5% from 3.25%, the 10th increase since mid-2004.

But investors turned around when oil prices resumed their climb despite new estimates from the U.S. Department of Energy of slower growth in world oil demand, which could take upward pressure off prices.

Investors, already uncomfortable with a series of refinery outages, focused in part on the agency’s supply report, which showed a 2.1-million-barrel decrease in the nation’s supply of gasoline last week.

Mark Vitner, economist at Wachovia Securities, noted that “it’s somewhat surprising how resilient the economy has been, despite higher energy prices.”

The concern on Wall Street, however, is that “eventually, higher gas prices will eat away at consumers’ purchasing power ... and slow economic growth,” Vitner said.

Among the day’s market highlights:

* Cisco dropped $1.36, or 6.9%, to $18.25 for the steepest decline in the S&P; 500. The company late Tuesday said sales this quarter would rise 10% from a year earlier, a weaker-than expected forecast.

Cisco was the most actively traded U.S. stock, with more than 202 million shares changing hands. That’s the most since Oct. 8, 2002, when the stock slumped to its bear-market low of $8.60. The shares are down 5.5% year to date.

Overall, technology shares retreated 1.3% on average, for the worst performance among the S&P; 500’s 10 industry groups. Microsoft lost 40 cents to $26.95 and IBM slid $1.48 to $82.02.

* Shares of some mortgage lenders continued their recent slide on worries about loan quality amid the real estate boom. Downey Financial tumbled $4.23 to $70.42, Commercial Capital slid 56 cents to $17.88 and Provident Financial lost $1.16 to $27.88.

Also, Fannie Mae fell $2.19 to $52.64. The largest source of money for U.S. home loans said Tuesday that it wouldn’t complete until the second half of 2006 what it estimated would be a restatement of earnings totaling $8.4 billion to $10.8 billion.

* Walt Disney declined 67 cents to $25.47. After the market closed Tuesday, Disney reported that fiscal third-quarter revenue totaled $7.72 billion, less than analysts’ average estimate of $7.9 billion in a Thomson Financial survey.

* Video rental chain Blockbuster continued to sink after its report Tuesday of a second-quarter loss. The stock lost 39 cents to $6.70.

* All 29 energy stocks in the S&P; 500 climbed, reflecting the jump in fuel prices. Exxon Mobil added 44 cents to $59.90. Valero Energy, whose shares have doubled this year, increased $1.61 to $90.77.

Many other commodity-related issues rallied, including mining firms Inco, up $1.45 to $42.61, and Cleveland-Cliffs, up $1.68 to $76.40.

* Tupperware jumped $1.71 to $22.81 after the company agreed to buy Sara Lee’s direct-sale cosmetics division for $557 million.