msnbc.com news services
updated 7/14/2006 7:18:53 AM ET 2006-07-14T11:18:53

Stocks retreated sharply for a second straight session Thursday, finishing with a triple-digit loss, as fighting in the Middle East between Israel and Hezbollah drove the price of crude oil to a new record high just below $77 .

Major Market Indices

“All of the negative action we’re seeing today is primarily due to geopolitical news out of the Middle East,” said Tom Schrader, head of U.S. equity trading at Stifel Nicolaus Capital Markets. “The one thing the markets hate above all else is uncertainty, and it’s creating a lot of that. We have oil at all-time highs for the same reason ... it’s kind of an ugly day.”

Many on Wall Street worried that the day’s headlines signaled a worst-case scenario. Continued gains in energy prices could prompt the Federal Reserve to keep lifting interest rates to contain inflation, but the recent spate of downbeat earnings news suggested that economic growth was already moderating. Investors fear higher rates in a cooling economy could lead to a recession.

“At this point in the cycle, you have questions about how much inflation is rising, what the Fed will do and how much growth will slow,” said Scott Wren, senior equity strategist at A.G. Edwards & Sons. “That’s a debate that’s going to be worked out over time. If you’re going to buy stocks, you have to take a stance” on where those numbers are headed.

The Dow Jones industrial average closed down 166.89 points, or 1.52 percent, adding to Wednesday’s 121-point drop and finishing below the psychologically-key 11,000 level.

The broader Standard & Poor’s 500-stock index finished the day down 16.31 points, or 1.30 percent, sinking into negative ground for the year, while the Nasdaq composite index tumbled 36.12 points, or 1.73 percent, to its lowest level since last October.

Bonds edged higher, with the yield on the 10-year Treasury note dropping to 5.08 percent from 5.1 percent late Wednesday. The U.S. dollar fell against the Japanese yen while gold prices climbed.

Escalating tension in the Middle East compounded worries over Merrill Lynch’s warning that higher lending rates and gasoline prices would likely pressure consumer spending at Wal-Mart Stores Inc. SAP AG further rattled investors after reporting weak software sales.

Although consumers and businesses have so far appeared to weather the persistently high price of oil, an uneasy start to second-quarter earnings has investors nervous about a potential downturn in the economy. Analysts, however, have insisted that the economy remains sturdy and that the market’s pessimism is overdone.

“There is definitely negative momentum to the news,” said Philip Dow, managing director of equity strategy at RBC Dain Rauscher. “It makes people believe we are genuinely headed for a bear market. But we have to have a bad economy for that to happen, and I don’t think we have one.”

Manufacturing conglomerate General Electric Co., which is often seen as a proxy for the global economy, releases its earnings Friday morning. Dow said a strong report from GE might not be enough to counter worry about the Middle East conflict and boost stocks. “My bet is when all is said and done, we’ll have a much more balanced reaction to the second quarter,” he said.

In Thursday’s economic news, the Labor Department said the number of first-time applications for jobless benefits rose 19,000 to 332,000 last week — a possible sign of an impending slowdown in the economy. Analysts had forecast a 7,000 increase.

SAP said second-quarter software sales grew 8 percent to $790 million, missing forecasts for 17 percent growth to $858.7 million. Shares of SAP tumbled $3.51 to $46.83, helping tech stocks to a second day of declines.

PepsiCo Inc., the No. 2 soft-drink company, said sales of non-carbonated beverages lifted its second-quarter profit by 14 percent to top Wall Street estimates. Shares of PepsiCo rose 97 cents to $62.07.

Tribune Co.’s share price fell 85 cents to $31.50 after the newspaper publisher posted a lower quarterly profit. Revenue slid 1 percent as circulation and television ad sales declined.

British insurance company Aviva PLC agreed to acquire U.S. insurer AmerUs Group Co. for $69 per share, or $2.9 billion. Shares of AmerUs rose 31 cents to $66.81.

Dow component Walt Disney Co. saw its share price sag $1.21 to $28.70. CIBC World Markets downgraded the media and entertainment company on concerns about its high stock price and a potential slowdown in 2007.

Merrill Lynch downgraded Wal-Mart one notch to “neutral.” Wal-Mart’s stock price fell 99 cents to $44.16.

Wall Street’s Wednesday decline pulled down overseas markets. Japan’s Nikkei stock average slid 0.99 percent, Britain’s FTSE 100 dropped 1.63 percent, Germany’s DAX index slumped 1.96 percent and France’s CAC-40 fell 1.81 percent.

The Associated Press and Reuters contributed to this report.

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