Disoriented investors will try to get their bearings next week with all eyes on black gold.
Oil flooded Wall Street Friday, slamming stocks with the help of more economic pain and financial disarray. After the recent 10% correction in oil futures markets, hopes of further easing got washed away by an epic, one-day, 11-dollar crude rally that sent prices gushing back to a new all-time record above $139-a-barrel.
Dow Jones Industrial Average
, having rallied by more than 100 points Thursday, turned around and fell nearly 400 on Friday. Elsewhere, credit markets are deteriorating again, and the financial industry continues to whither. Inflation is threatening, the dollar is weakening, job losses are mounting and fear is regaining its hold on the stock market.
"This is a train wreck in slow-motion," says Paul Mendelsohn, chief investment strategist with Windham Financial Services.
For the week, the Dow shed 3.4%, while the
lost 2.8% and the
ended down 1.9%.
High fuel costs resulting from the relentless rise in oil prices are a crushing weight on businesses and consumers, but some investors insist that crude is due for a collapse.
"Oil prices are simply too high," says independent investment strategist Subodh Kumar. "When you see this kind of volatility, it's a clear sign that speculators are driving the market."
Nevertheless, Morgan Stanley analyst Ole Slorer predicted strong demand in Asia could drive prices to $150 by the July 4 holiday.
The smattering of economic data on tap for next week will take on new significance after crude's latest rally and Friday's employment report, which showed that May was the fifth-straight month of a declines in nonfarm payrolls, down 49,000. Worse yet, the unemployment rate spiked to 5.5% during the month from 5% -- its largest one-month increase since 1986.
President Bush said the rise in unemployment is "clearly a sign that is consistent with slow economic growth," in a speech on Friday.
set for another policy meeting in late June, investors priced in a lower chance that the central bank will be able to raise rates to fight inflation in 2008, as recession fears grow.
This week, the Fed will release its so-called beige book report on U.S. economic conditions on Wednesday, after the Census Bureau provides a tally of the U.S. trade deficit for April on Tuesday.
"The market will be scouring the Fed's assessment of the manufacturing and employment sectors," says Mendelsohn. "The Fed has an economic slowdown problem, and it's going to deal with that instead of the inflation problem because they can't raise rates at a time when things are so fragile. But inflation is clearly a problem here, and the Fed may well lose control of it."
Investors will get a fresh look at the government's main inflation gauge on Friday when it releases a report on the consumer price index for May. The headline figure is expected to show consumer prices up 0.5% for the month, up from 0.2% in April. Excluding food and energy prices, prices are expected to gain 0.2%, up from 0.1%.
Also Friday, the University of Michigan will release its preliminary consumer sentiment index for June. Economists are forecasting a reading of 57.5, which would mark a rebound from 51.1 in May -- its lowest level since 1990.
On Thursday, the government will report increases in import and export prices in May, and retail sales, which are expected to have increased 0.6% after April's 0.2% decline. Also, the Census Bureau is expected to report that business inventories grew by 0.4% in April from 0.1 in March.
Earnings will be light this week, but
( LEH) reportedly is mulling the early release of its second-quarter earnings amid speculation that the nation's fourth-largest investment bank is facing heavy losses on investments tied to the mortgage market.
said that Lehman could report a fresh capital raise of as much as $5 billion, and Wachovia Capital Markets analyst Douglas Sipkin said Lehman could suffer $3 billion of losses tied to asset sales and hedging.
Investors are especially sensitive to Lehman's troubles after the Fed rescued its counterpart,
, from bankruptcy in mid-March and orchestrated a fire sale of the firm to
. Several financials, including
( NCC) and
American International Group
sank to 52-week lows during Friday's selloff.
Meanwhile, Standard & Poor's downgraded its top credit ratings on bond insurance giants
( ABK), and its counterpart, Moody's Investors Service, warned that it would likely do the same.
The loss of a triple-A credit rating could spell doom for both companies, as they depend on stellar credit in order to write insurance policies on debt securities. Moreover, the downgrades mean the credit ratings agencies will have to downgrade ratings on tens of thousands of securities that are insured by the companies. That comes as the major ratings firms face investigations by regulators and lawmakers amid criticism for pumping up the credit bubble by supplying overly accommodative ratings to the debt issuers that pay them.
These actions raise the specter of counter-party risk, systemic problems and general uncertainty in the financial markets.
"Here we go again," says Mendelsohn.