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Stocks Dive on Concerns Over Oil, Earnings

Wall Street: Investors also are spooked by the euro's slide, which harms U.S. companies with European operations.


September has a reputation for being Wall Street's cruelest month, and that's playing out in grim fashion this year: Stocks tumbled again Monday, extending the market's losses for the month amid skyrocketing oil prices and growing worries about corporate earnings.

The technology-laden Nasdaq composite index dove 108.71 points, or 2.8%, to 3,726.52 on Monday. After a sharp August rally the index has fallen 12% from its Sept. 1 close, and is down 26% from its March record high.

The Dow Jones industrial average skidded 118.48 points, or 1.1%, to 10,808.52 on Monday. It's down 3.8% since Sept. 1.

In contrast to last week, when the selling was centered in larger stocks with international exposure, Monday's losses were broad-based: Losers swamped winners by nearly 3 to 1 on Nasdaq and on the New York Stock Exchange, though volume was moderate.

Two sectors that had been holding up well--small- and mid-size stocks--were hit hard Monday. The Standard & Poor's 400 mid-cap index dropped 2.9% and the small-cap S&P 600 index stumbled 2.8%.

The sell-off was fed by another rise in crude oil prices, with the price climbing 96 cents to $36.88 a barrel in New York futures trading. The price soared as high as $37.15 during the day, the highest since October 1990, amid rising tensions between Iraq and Kuwait.

Some analysts say rising energy prices--and what they might do to corporate earnings--are the major force driving stocks lower.

Spiraling energy prices threaten corporate earnings in two ways: First, they boost many companies' raw materials costs and general corporate expenses; second, they could trigger a deeper economic slowdown if consumers rein in their spending in the face of higher gasoline and heating oil prices.

In recent weeks, many companies warning that third-quarter earnings won't meet expectations have cited either rising costs or weakened demand, or both.

Investors also have been spooked by the continuing slide in Europe's single currency, the euro. The euro fell to a record low of 85.1 U.S. cents in Tokyo on Monday, before recovering to close at 85.5 cents in New York.

A falling euro hurts U.S. firms with large European operations because their sales in that region are converted into fewer U.S. dollars.

Economists worry that the risks from rising energy prices are highest in Europe. Because oil is priced in U.S. dollars on world commodity markets, Europeans face the added cost of swapping the weak euro for dollars.

"We have a major worry in that not only is the price of oil shooting up, but our trading partners in Europe, Asia and Latin America could go into recession, which could hurt our exports and earnings," said Sung Won Sohn, chief economist at Wells Fargo & Co. in Minneapolis.

Although U.S. consumers spend only about 3% of disposable income on energy, their European counterparts are forking over the equivalent of 9% because of the weak euro and higher taxes, said Peter Canelo, investment strategist at Morgan Stanley Dean Witter.

"That may actually reduce the size of Christmas presents," Canelo said.

Many of the U.S. consumer cyclical and consumer staples companies that have warned about third-quarter earnings troubles have blamed the euro.

Despite the jitters, earnings warnings from companies are occurring at about the same pace this quarter as a year ago, according to First Call Corp.

Thus far this quarter, 138 companies have issued negative earnings "pre-announcements," compared with 129 at the same time last year. The numbers are up sharply from the second quarter, however.

Aggregate profits for the S&P 500 companies are expected to rise 17.2% in the third quarter, analysts estimate. But the actual figure will probably be closer to 19%, said Chuck Hill, First Call's research director.

That's down from 23.6% in the first quarter, but is still solid growth, he said.

However, profits could be a bigger problem in the fourth quarter because of the continuing run-up in energy prices and the still-sliding euro.

Bulls, however, say the worries are overdone, in part because of seasonal factors.

Though the market's troubles in October are better known because of the market crashes of 1929 and 1987, September is actually the worst month historically. Since 1950, the S&P 500 has lost an average of 0.2% for the month versus a 0.5% rise in October, according to Stock Trader's Almanac.

On the bright side, any economic slowdown resulting from the rise in oil prices is likely to keep the Federal Reserve from raising interest rates, analysts note.

Bulls cling to the notion that the U.S. economy can still achieve the hoped-for "soft landing," with growth slowing enough to keep the Fed on the sidelines but still strong enough to fuel corporate profits.

Though technology stocks have been among the hardest hit in recent weeks in part because of concerns about European sales and earnings, Canelo argues that European firms will continue to spend on technology to remain competitive with their American rivals.

Market Roundup: C14, C15


The Cruelest Month

Since 1950, the stock market's September performance has, on average, been the worst of all months of the year, as measured by the Standard & Poor's 500 index.


Average change in S&P 500 index each month, 1950-1999

Sept. avg.: -0.2%

Source: Hirsch Organization

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