updated 8/11/2005 7:09:31 AM ET 2005-08-11T11:09:31

Oil prices that soared to $65 a barrel choked off an early rally on Wall Street Wednesday, pummeling the market’s optimism about the economy in the process. The tech-focused Nasdaq composite index was also hurt by a disappointing forecast from networking gear maker Cisco Systems Inc.

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Analysts said investors had begun the day confident that the U.S. economy will stay strong, absorbing both higher short-term interest rates and rising gasoline prices. But the erosion of stocks’ early advance — the Dow Jones industrials had gained more than 100 points — was proof that many investors remained uneasy and inclined to sell when oil climbs higher.

The Dow fell 21.26, or 0.2 percent, to 10,594.41.

Broader stock indicators also fell, having given up earlier gains. The Standard & Poor’s 500 index fell 2.25, or 0.18 percent, to 1,229.13 and the Nasdaq composite index dropped 16.38, or 0.75 percent, to 2,157.81.

The market’s pullback came as oil prices resumed their climb despite new estimates from the U.S. Department of Energy of slower growth in world oil demand.

The department’s Energy’s Energy Information Administration said it expects world oil demand to grow by 1.7 million barrels per day this year to 84.2 million barrels per day. That was down from its forecast a month ago of 2.2 million barrels a day growth, largely because of lower projections for China. Still, the agency expects oil prices to average above $56 a barrel through 2006 , with spikes to $60 possible.

Oil prices rose $1.83 to settle at $64.90 on the New York Mercantile Exchange.

The latest oil report came a day after the Federal Reserve raised short-term interest rates one-quarter percentage point to 3.5 percent, its 10th consecutive rate increase.

The Fed again stated that its interest rate policy is “accommodative” and future rate hikes can continue at “a pace that is likely to be measured,” suggesting that the economy should continue expanding.

Jeffrey Saut, chief investment strategist for Raymond James in St. Petersburg, Fla., said the Fed’s move also gave stocks a boost because the Fed officials continued to use the word “measured.”

“I had been of the belief that the Fed was close to being done,” he said. “But based on yesterday’s statement, it feels like they’re going to continue raise interest rates. My concern is that could raise problems down the road.”

American International Group Inc., the insurer rocked by state and federal accounting investigations, rose $1.27, or 2 percent, to $62.69 after the New York-based firm reported strong second-quarter earnings above Wall Street expectations.

Federated Department Stores Inc., owner of such nameplates as Bloomingdale’s and Macy’s, said its earnings nearly doubled in the second quarter, and the company sees sales growth picking up in the second half of the year. Federated advanced $1.51, or 2 percent, to $74.27.

But Cisco Systems Inc. fell $1.14, or more than 5 percent, to $18.47 after the firm posted a higher fourth-quarter profit but said sales in its first fiscal quarter were likely to increase 10 percent, less than analysts were expecting.

Other tech stocks turned down, too, with Microsoft Corp. dropping 22 cents to $27.13 and IBM dipping 50 cents to $83.

The Walt Disney Co. dropped 74 cents, or nearly 3 percent, to $25.40 when third-quarter results showed a rise in profits but revenue came in below expectations.

The Russell 2000 index of smaller companies was up 0.96, or about even, at 661.44.

Advancing issues outnumbered declining issues by about 2-to-1 on the New York Stock Exchange, where volume came to 1.04 billion shares on Wednesday, up from 883 million the day before.

Overseas, Japan’s Nikkei stock average rose 1.66 percent. Britain’s FTSE 100 advanced 0.3 percent, Germany’s DAX index rose 1.65 percent and France’s CAC-40 increased 0.8 percent.

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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