U.S. equities finished lower on Tuesday, giving back earlier gains with energy and technology stocks leading the way lower. Oil prices fell but recovered from a brief drop to five-month lows. Reports of minimal damage to Gulf Coast oil platforms from Hurricane Gustav had sent oil prices reeling, but some energy experts say it will take a few days for companies to inspect their facilities and return to normal production levels.
On Tuesday, the Dow Jones industrial average gave up a nearly 250-point rally to end 26.63 points, or 0.23%, lower at 11,516.92. The broader S&P 500 index closed down 5.26 points, or 0.41%, at 1,277.57. And the tech-heavy Nasdaq composite index lost 18.28 points, or 0.77%, to finish at 2,349.24.
On the New York Stock Exchange, 17 stocks lost ground for every 14 that traded higher, and the ratio was even at 17-17 on the Nasdaq, amid slow trading, S&P MarketScope said. Concerns about weaker commodity prices pushed stocks lower, with technology names also heading lower, offsetting gains in airlines, which benefitted from the drop in oil prices, and financials, which were led by increases in Fannie Mae (FNM) and Freddie Mac (FRE).
Among stocks moving Tuesday, state-owned Korea Development Bank reportedly confirms it is in talks with Lehman Brothers (LEH) over a possible joint investment in the firm with other Korean banks.
UAL Corp. (UAUA) is among airliners whose shares jumped as oil prices dropped sharply on signs that the weakened Hurricane Gustav didn't do as much damage in the Gulf as originally feared. Delta Air Lines (DAL) shares were also up dramatically.
"I was shocked to see [stocks] go up and I'm not shocked to see them come down," says Bob Andres, chief investment strategist at Investnet in Philadelphia. The impact of energy prices and inflation risks on equities are substantially less important than they would be in normal times due to the overhang of the intertwined credit and housing crises, he says.
He suspects the hands of day traders or hedge funds in the bounce of financial stocks, given that "there's no relationship between energy prices and financials." In fact, if energy prices are falling not just because the Gulf Coast avoided significant disruptions to output, but on the slowing of the global economy, it should be worse for banks and other financial institution, he adds.
It's virtually impossible for stocks to do well with volatility at annualized levels of 150% to 200% and corporate bond spreads touching all–time highs, Andres says. He believes that the stock markets won't improve until housing prices fall to where they are as affordable as they were in the late 1990s.
Oil prices traded sharply lower on Tuesday -- though off five-month lows below $106 a barrel -- as companies prepared to restart production from rigs closed by Hurricane Gustav, which spared the Gulf Coast the devastation caused three years aho by Hurricanes Katrina and Rita. The markets are watching the progress of Hurricane Hanna, followed by Tropical Storms Ike and Josephine cited in the Caribbean.
Crude oil for October delivery settled $5.75 lower to $109.71 a barrel. Oil prices are likely to be between $95 and $105 a barrel by the end of this year, Christopher Edwards, managing principal at FIG Partners Energy Research & Capital Group said in an interview on Bloomberg Television on Tuesday.
The dollar index rose as the euro and sterling plunged on the theory that the U.S. economy might be near bottom, while European growth is slowing, according to S&P MarketScope. Gold futures also plummeted as the greenback surged.