U.S. Stocks Slip on Crude Oil, Fall Hard

Updated from 4:20 p.m. EDT

Stocks in the U.S. plunged into the close Wednesday after crude oil tapped a new record, as mostly positive earnings and a better-than-expected productivity report failed to pull buyers out of the woodwork.

The Dow Jones Industrial Average finished down 206.48 points, or 1.59%, to 12,814.35 -- just shy of the index's session low. The S&P 500 slid 26 points at 1393, and the Nasdaq Composite was off 44.82 points at 2438.49, meaning losses of 0.8% for both.

Stocks began on soft footing, but slid even further after crude oil hit a new high, $123.75 a barrel, even though the government said crude stockpiles were up by 5.7 million barrels last week. Crude later eased to a $1.69 gain at $123.53.

"It is unfortunate that oil rallied with the market, making the gains more difficult," said Marc Pado, U.S. market strategist with Cantor Fitzgerald. "I do think that we could have easily broken above [the major indices'] 200-day moving average targets had it not been for crude."

Mushrooming crude futures have been gnawing at investors, since higher gas prices tend to deflate consumer spending. On the bright side, noted Georges Yared, chief investment strategist with Yared Investment Research, people are already receiving their tax-rebate stimulus checks from the federal government.

"Some people say everyone's going to put that money into savings, but I think people are going to spend those checks," he said. "Americans are shoppers."

Stocks' breadth was poor. Decliners outran advancers by a 7-to-3 margin on both the New York Stock Exchange and the Nasdaq as trading volume reached 2.03 billion shares and 2.29 billion shares, respectively.

"I think we're in a fragile recovery," said Phillip Roth, chief technical market analyst with Miller Tabak, referring to the market's longer-term action. "The market's in a struggling advance. And after yesterday's reversal early, which seemed like a pretty powerful reversal, it fizzled at the end of the day, and there's no follow-through."

Bill Stone, chief investment strategist with PNC Wealth Management, pointed out that the S&P has risen nearly 11%, including dividends, since its March low point. "Most people would call that a year's return," he said. "I would expect people to digest it a little bit."

Roth, who maintains that the market's climb for most of 2008 remains a bear-market rally, called the action over the past few months "a crummy, light-volume rally with poor breadth. And it looks like it might be ending. It's also more than 3 months old. It basically began in the third week of January for most stocks."

"We haven't seen the low," Roth continued, "and I think we're going to break below the March lows. It's just a question of when."

On the plus side Wednesday, the Labor Department said first-quarter nonfarm productivity rose at a 2.2% annual rate, topping the 1.5% consensus estimate and the 1.8% pace in the fourth quarter. Job cuts and reductions in hours worked helped the increase. Growth in productivity is viewed as a sign that inflation is being kept under control.

At the same time, unit labor costs were up 2.2%, a cooler figure than had been forecast and down from a 2.8% advance in the previous quarter.

However, hawkish remarks from a Federal Reserve official were contributing to keeping the major averages in check. Thomas Hoenig, president of the Kansas City Fed, though not a voting member of the Federal Open Market Committee, said during a speech Tuesday that policymakers might have to look at raising interest rates in order to deal with "serious" inflation issues.

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