While a continued slide in crude oil prices and strong April retail sales could have signaled the end of the "soft patch," they couldn't soften the sting of weak

Wal-Mart

(WMT) - Get Report

numbers, interest rate worries and a new batch of hedge fund paranoia Thursday.

Nor was falling oil, in and of itself, a good thing. Just as Wal-Mart said its earnings outlook remains clouded by higher gasoline prices, the lower price of oil slammed the energy sector, weighing heavily on the market.

Crude oil plunged through its key support level of $50, losing $1.91 on the day to close at $48.54 a barrel in Nymex trading. The June contract has lost about 7% since Tuesday's close. In response, the Amex Oil Index fell 3.68% on Thursday, led by a 4.3% decline in

Exxon Mobil

(XOM) - Get Report

.

It seems surprising that the slide in crude oil did not generate a relief rally, after soaring prices cut into growth and profits, including Wal-Mart's. But perhaps it is the reason for lower oil prices that is freaking out investors. Besides rising U.S. inventories, oil fell sharply Wednesday after the International Energy Agency noted that global demand for the commodity is slowing. Along the way, shares of raw-materials producers also fell sharply.

There was more noise in the market Thursday that hedge funds -- licking their wounds from recent losses on

General Motors

(GM) - Get Report

-- might be trying to finance upcoming redemptions by selling long oil positions.

Contributing to the debt market uncertainty, Moody's downgraded

Ford

(F) - Get Report

Thursday, though stopped short of consigning it to the junkyard, as Standard & Poor's did a week earlier. Moody's also cut

Visteon

(VC) - Get Report

last night.

And S&P, after downgrading

Deutsche Bank's

(DB) - Get Report

collateralized-debt obligations, also now has cut some of

BNP Paribas'

CDOs. Many of these CDOs are suspected to contain large exposure to GM and Ford bonds.

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Add to this that strong retail sales give more fodder for the

Fed

to continue raising rates, and there was nowhere for this market to go but down. The

Dow Jones Industrial Average

fell 110.77 points, or 1.08%, to 10,189.48. The

S&P 500

lost 11.75 points, or 1%, to 1159.36, and the

Nasdaq Composite

dropped 7.67 points, or 0.39%, to 1963.88.

If global growth is slowing, it might be time to reassess the market leadership assumed by the energy and materials sector since last year. According to Thomson/First Call's tally of first-quarter reports so far (about 90% of S&P 500 companies have already reported), earnings are up roughly 14% from the same period last year. That's almost double what Wall Street expected going into the earnings season.

Energy and materials accounted for most of the performance. According to Thomson, energy earnings came in 41% above last year's period, while materials producers were 64% above. Yet, as was made evident when the market sold Exxon Mobil and other oil majors when they posted earnings several weeks ago, investors now wonder what to do with these "growth" stocks.

Oil may have finally come back to bite its own tail -- and that of the materials sector -- by slowing global growth enough to cool demand. In the meantime, the debate over the extent of an energy-induced soft patch in the U.S. economy continues.

The market struggled for much of the morning trying to reconcile much stronger-than-expected retail sales in April and Wal-Mart's dismal first-quarter earnings.

The Commerce Department said that retail sales rose 1.4% in April, far above market expectations for a gain of 0.8%. As gasoline prices came down during the month and the weather improved, it would seem that consumers made a comeback.

"This puts another nail in the coffin of the idea that there's been a sharp slowdown in economic growth," says Goldman Sachs economist Andrew Tilton, noting that the retail sales figure is the third significant economic report this month that points to the economy's resilience. The April employment report last week and the March trade deficit Wednesday all contributed to ease concerns over a soft patch in economic growth.

But for a few dedicated economists, questions remain. First, it seems that much of the March figures were distorted by seasonal factors that unwound in April, therefore leaving an uncertain economic picture. "These data will doubtless be spun as evidence of the end of the soft patch, but they are not," says Ian Shepherdson, chief North American economist at High Frequency Economics.

Dismissing the existence of an oil-induced soft patch would be a mistake, he says. The drop in consumer sentiment resulting from higher gasoline prices first has to reverse before the end of the soft patch can be officially put behind.

Wal-Mart's dismal first-quarter earnings and its CEO's comments reflected the same concerns. The world's largest retailer said it struggled with U.S. sales due to poor weather and as consumers felt the pinch of soaring gasoline prices. What's worse, more weakness is expected in the second quarter before earnings can improve -- thanks to easy year-on-year comparisons -- in the second half, Wal-Mart warned.

Perhaps something else can explain why April retail sales were strong: gasoline sales. That's right, gasoline stations are retailers as well, and their sales in April were 19.8% higher than last year, notes Wachovia economist Gina Martin. While they barely accounted for any of the overall gains in retail sales in April, this may be felt more over the coming months as gasoline prices keep going down at the same time that consumers remain cautious.

And then there are those economists who are revisiting the meaning of the March trade deficit figures. Goldman's Tilton, for one, notes that the slowdown in U.S. imports was likely the result of softer U.S. consumption. In addition, the drop of exports from China and nearby Asian countries with large Chinese communities was likely the result of the timing of the Chinese New Year. "The second-quarter outlook

for trade is less certain," Tilton says.

For the most part, economists still expect quarterly growth of 3%-3.5% for the balance of the year.

The first risk to these forecasts remains the price of oil and its lagging impact on consumers. Over the past several weeks, oil prices have been playing their part. And as U.S. inventories continued to rise, there was evidence on Wednesday that global demand for oil, including from China, is increasing at a slower pace than last year.

Of course, if inflation pressures do accelerate, the Fed may have to apply the brakes more aggressively. The bond market didn't seem that concerned Thursday, with the 10-year Treasury rising 6/32 in price while its yield fell to 4.17%. A strong auction of 10-year notes and continued flight to safety from equities and corporate bonds contributed to the gains.

To view Aaron Task's video take on today's market, click here

.

In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send

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