Stocks Dive on Fears of a Faltering Economy

The stock market plummeted Friday in heavy trading, sending blue-chip indexes to their worst one-day losses in more than two years, as another surge in oil prices and disappointing earnings from some big-name companies raised new concerns about the economy’s health.

The Dow Jones industrial average tumbled 213.32 points, or 2%, to 10,667.39, giving up all of its gains from a rally that had stoked widespread optimism in the first two weeks of the year.

Technology stocks, which had led the new year’s advance, were hit hard as some investors fled. Internet search firm Google Inc. suffered its sharpest sell-off since going public 17 months ago. The company’s shares fell $36.98, or 8.5%, to end the day at $399.46.

The market’s mood turned Friday as crude oil prices topped $68 a barrel, nearing the record of almost $70 that was reached shortly after Hurricane Katrina devastated the Gulf Coast.

Also, General Electric Co., considered a bellwether for the U.S. economy because of its diverse businesses, reported fourth-quarter sales and earnings that were less robust than many investors had hoped.

GE’s report, which followed disappointing quarterly results in recent days from other blue-chip firms including computer chip leader Intel Corp. and chemical titan DuPont Co., revived fears that the economy might be decelerating significantly -- which could point to more profit disappointment ahead and undermine stocks.

“The economy is slowing ... and the market is waking up to that,� said Robert Doll, chief investment officer at Merrill Lynch Investment Managers.

The Dow’s loss Friday was its biggest percentage drop since May 2003, and the first drop of more than 200 points since March of that year.

But many analysts also said stocks simply were overdue for a pullback after a powerful rally that had lifted the Dow more than 8% since mid-October. The widely watched index closed above 11,000 on Jan. 9, its first breach of that level since 2001.

Some experts cautioned against betting that the economy would continue to lose steam.

“Yes, there was a slowdown in the fourth quarter. We know that,� said Drew Matus, an economist at brokerage Lehman Bros. in New York. “But I think things are shaping up for a very good first quarter.�

Indeed, the government reported Thursday that new claims for unemployment benefits in the week ended Jan. 14 were the lowest since April 2000, a potential sign of strength in the job market.

Investors had entered the new year in high spirits, thanks in part to fresh signs that the Federal Reserve was nearly finished raising interest rates after 18 months of steady increases. The Fed’s key rate has risen from 1% in mid-2004 to 4.25% now.

The central bank on Jan. 3 released the minutes of its mid-December meeting. The report said that most Fed policymakers believed that the number of additional rate hikes “probably would not be large.�

Historically, an end to rising interest rates has been bullish for the stock market, so long as the economy wasn’t in danger of tipping into recession.

Optimism about rates and the economy had helped investors look past a rebound in oil prices since late December, and encouraged some to snap up technology stocks and other issues considered riskier bets. Google shares reached $471 on Jan. 11, up 14% from year-end after rocketing 115% in 2005.

But this week, Wall Street’s focus shifted to disturbing events overseas.

Oil prices soared anew Tuesday on concerns about Nigerian militants’ attacks on energy facilities in that major crude-exporting nation. Prices also were boosted by fears that the standoff between the United States and Iran over the latter’s nuclear research program could lead to a curtailment of oil supplies from that country, even as global demand for energy remains strong.

On Thursday, an audiotape from Al Qaeda leader Osama bin Laden threatening terrorist attacks in the U.S. added to investors’ jitters, although the stock market still closed higher.

On Friday, as oil prices in New York shot up $1.52 to $68.35 a barrel, some on Wall Street began to throw in the towel on stocks. The market fell at the outset and continued to slide all day.

The sudden turnabout in the market’s mood “tells you that geopolitical risk has moved from the back burner to the front burner,� said Michael Panzner, head of trading at Rabo Securities.

It didn’t help that stock prices in Japan, which far outpaced U.S. shares last year, plunged for most of this week after prosecutors raided the Tokyo offices of a popular Internet firm on suspicion of financial fraud.

But the bigger concern Friday may have been the earnings report from GE, some analysts said. Its earnings before one-time gains and losses were $5.8 billion in the fourth quarter, up less than 1% from a year earlier. Although the company’s profit was in line with analysts’ estimates, many investors had hoped GE would beat those expectations. What’s more, the company’s sales of $40.7 billion were less than expected.

Quarterly results from financial services titan Citigroup Inc. on Friday also were weaker than what many investors had expected.

GE shares slid $1.31, or 3.8%, to $33.37. Citigroup’s shares dived $2.25, or 4.7%, to $45.69.

The GE and Citigroup reports, on the heels of earnings shortfalls at DuPont, Intel and aluminum leader Alcoa Inc., among others, have raised worries that corporate America’s long streak of robust profit growth was coming to an end.

“We have seen a broad swath of earnings misses and warnings� from companies in the last week, said Barry Ritholtz, head of investment firm Ritholtz Capital Partners in New York.

If earnings slow dramatically or begin to decline, investors’ interest in owning shares could dim, at least in the short run, because earnings underpin stocks.

On average, blue-chip companies’ earnings have risen at a double-digit percentage rate, measured year-over-year, every quarter since the third quarter of 2003, according to Thomson Financial.

Despite the high-profile profit disappointments at GE and some other large companies, many firms have issued strong quarterly results. Chip maker Advanced Micro Devices Inc., railroad firm Union Pacific Corp. and brokerage Merrill Lynch & Co. this week all reported results that beat expectations.

“I think it’s too early to think we’re undone� in the stock market and the economy, said David Dreman, head of investment firm Dreman Value Management.

An ongoing debate is whether the growth struggles of some of the nation’s biggest companies paint a misleading picture of the economy overall.

Shares of GE, Wal-Mart Stores Inc. and IBM Corp., among other blue-chip names, all declined last year. Yet shares of many smaller companies advanced. The average New York Stock Exchange stock was up 7%, while the Dow lost 0.6%.

A more competitive global economy may be hampering established companies while opening up opportunities for smaller firms, some investors say.

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Woeful titans

Some of the nation’s biggest stocks are down sharply this year after struggling last year as well.

Stock price change:

*--* Company 2005 YTD Home Depot -5.3% -0.8% IBM -16.6 -1.0 Time Warner -10.3 -2.1 Alcoa -5.9 -2.6 Wal-Mart -11.4 -3.8 Bank of America -1.8 -4.2 General Electric -4.0 -4.8 Citigroup +0.7 -5.9 DuPont -13.4 -7.0 Intel +6.7 -12.8 S&P; 500 +3.0 +1.1 NYSE compos. +7.0 +1.9

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Figures exclude dividend income.

Source: Bloomberg News