By
msnbc.com
updated 3/17/2005 9:56:23 AM ET 2005-03-17T14:56:23

Stocks tumbled Wednesday, with the Dow Jones industrial average shedding 112 points, after crude oil prices shot up to historic highs and General Motors issued a grim earnings warning.

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The breadth of the market’s decline suggested investors were interpreting the surge in oil prices as a warning sign that inflation could be the next big worry for the economy, analysts said. Higher energy prices can hurt corporate profits and dampen consumer spending, which accounts for two-thirds of economic growth.

“The fact that oil prices are above $56 [a barrel] is obviously bad news for investors and it means the market is discounting higher interest rates,” said Peter Cardillo, chief strategist at New York retail brokerage S.W. Bach.

“It raises the question of how high rates will go before economic growth is dampened,” he added. “Higher rates and higher oil prices are a major headache as far as corporate profits are concerned.”

Oil prices had started the day lower after OPEC ministers said they would increase output, but prices jumped in afternoon trading after the Department of Energy released data showing domestic supplies of gasoline and heating oil fell sharply last week. Crude rose $1.41 in New York trading to settle at $56.46 a barrel, a new high.

“Inflation is really spooking the market in a way that it hadn’t before,” remarked Brian Pears, head equity trader at Victory Capital Management in Cleveland.

The Dow Jones industrial average was down 112.03 points, or 1 percent, at the close of trading, while the broader Standard & Poor’s 500-stock index was off 9.68 points, or 0.8 percent. The Nasdaq composite index gave up 19.23 points, or 0.9 percent.

General Motors, a Dow component and the world’s largest carmaker, warned its 2005 earnings will be as much as 80 percent below its previous forecast. GM’s warning sent its share price plunging 14 percent to $29.01. Shares of other automakers, including Ford Motor and DaimlerChrysler AG, also fell.

The drop in GM’s share price weighed on the broader market, with investors looking to it as a bellwether for other big companies struggling with high fixed costs, said Art Hogan, chief market analyst at Jefferies & Co. in Boston.

“In the past the expression has been that as goes GM, so goes the rest of the market,” Hogan said. “It’s an old hackneyed phrase, but it’s proving true today.”

The Commerce Department added to Wall Street’s malaise by reporting that the U.S. current account deficit soared to a record $665.9 billion last year, 25.5 percent above the previous record set in 2003, fueling fears that the United States will be unable to attract the foreign investment needed to finance the gap.

Qwest Communications International saw its stock price fall 1 percent to $3.82 after the company sweetened its offer for MCI. Shares of rival suitor Verizon Communications fell 1 percent to $35.34, while MCI's share price declined 1.2 percent to $23.75.

Shares of Research In Motion Ltd., the Canadian company that makes BlackBerry wireless e-mail devices, jumped 17.7 percent to $78.96 after the company said it would pay $450 million to settle a lawsuit from NTP Inc., a Virginia company which said the devices infringed on in its patents.

Shares of Toys “R” Us rose 2.8 percent to $24.77 after The Wall Street Journal reported that the buyout specialist Kohlberg Kravis Roberts & Co. and an investment group led by Cerberus Capital Management LP have each made offers for the company.

A strong profit report from Wall Street brokerage Bear Stearns Cos. failed to inspire investors, coming a day after competitor Lehman Brothers Holdings reported a 32 percent profit gain. Bear Stearns beat expectations with a 4 percent gain in net earnings, but its share price fell 3.7 percent to $102.13.

Overseas, Japan’s Nikkei stock average rose 0.4 percent Wednesday. Britain’s FTSE 100 fell 1.25 percent, Germany’s DAX index fell 1.8 percent and France’s CAC-40 declined 1.4 percent.

Reuters and the Associated Press contributed to this report.

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