Losses in the US Market

Strong crude pieces throughout the week send stocks tumbling

The last week that ended on Friday, 23 May, 2008 was mainly dominated by the crude oil and a plethora of economic news. Soaring oil prices were mostly to blame, but renewed concerns about the state of the financial sector and growing concerns about inflation pressures also played a part in dictating the market's fate this week. Unlike stocks, oil prices kept moving higher this week, touching $135.09 at their high before settling at $131.82 on Friday.

The Dow Jones Industrial Average lost 507 points for the week. Tech - heavy Nasdaq lost 84 points. S&P 500 lost 50 points. In percentage terms the three indices lost 3.9%, 3.4% and 3.3% respectively.

Among major economic news hitting the week, existing home sales in April fell 1.0% from March to an annualized rate of 4.89 million units. That was better than expected. It marked a decline of 3.6% from six months ago when October sales computed to an annualized rate of 5.06 million units. In the five months leading up to October, existing home sales fell 17.2%.

Separately, weekly initial claims and the leading indicators reports were encouraging from an economic standpoint, yet they were overshadowed by inflation concerns tied to a less than pleasing Producer Price Index, the jump in oil prices and some sobering statements in the minutes from the 30 April FOMC meeting.

The FOMC released the minutes from its 30 April meeting around 2:00 ET, which sent stocks tumbling. The 2008 inflation outlook was increased, as was the unemployment rate forecast. Also, as per Fed, real GDP growth is expected to range from 0.3% to 1.2% this year. The Fed previously forecast growth between 1.3% and 2%.

The Fed also announced that it expects unemployment will "increase significantly," raising its 2008 forecast to 5.6% from 5.25%. In addition, inflation risks have increased, with the Fed raising its core-inflation forecast to between 2.2% and 2.4% from between 2% and 2.2%.

Earnings reports were mostly better than expected, but the market's response was mixed. Hewlett-Packard and Analog Devices topped their respective earnings estimates.

From a sector standpoint, there wasn't much leadership. Even the energy sector dropped more than 2% as worries about demand destruction in the face of such high energy prices curtailed the bullish enthusiasm toward the sector. The financial sector plummeted more than 6% as many firms cut earnings estimates for a number of investment banks and arguments were made that the worst is not over for the sector. The transportation sector was the other big casualty.

Supply concerns and speculative interest were heralded as the main drivers of oil prices. Crude-oil futures for light sweet crude for July delivery closed at $132.19/barrel (higher by $1.38/barrel or 1.06%) on the New York Mercantile Exchange. During intraday trading, it touched a high of $133.69. For the week, crude prices closed higher by 5%. For the year, crude is up by 32% till date. Prices have more than doubled on a yearly basis.