CONCERNS that rising oil prices could hurt economic recovery prompted investors yesterday to sell stocks and hedge against further declines.
The CBOE Volatility Index (VIX), Wall Street’s so-called fear gauge, jumped 13.1 per cent to 20.75 on growing uncertainty about oil. The index measures the cost of using options as insurance against a decline in the S&P 500 index.
“We’ve been seeing how quickly the VIX can spike up, and there is no reason to believe that it won't double from where it is now,” said Harry Rady, CEO of Rady Asset Management in San Diego, California.
Brent crude rose above $115 a barrel as supply disruptions persist and political violence spreads in the Middle East and North Africa. Higher oil translates into increased energy and gasoline costs for consumers.
Federal Reserve Chairman Ben Bernanke said the recent surge in oil was unlikely to derail the economy, but his comments did little to reassure investors worried that turmoil in the Middle East could hit Saudi Arabia, the world’s largest oil exporter. The Dow Jones Transports index fell 2.5 per cent.
Stocks have taken their cue from oil since the start of turmoil in the Middle East and North Africa in January. The S&P had its weakest performance since November last week but still tallied three months of gains.
The Dow Jones industrial average fell 168.32 points, or 1.39 per cent, at 12,058.02. The Standard & Poor’s 500 Index dropped 21.04 points, or 1.59 per cent, to 1,306.18. The Nasdaq Composite Index lost 44.86 points, or 1.61 per cent, to 2,737.41.
About 8.67bn shares traded on the New York Stock Exchange, NYSE Amex and Nasdaq, higher than last year’s daily average of 8.47bn. Volume has recently been solid on days when the market falls, but often comes under 7bn on up days.
Investors took a cautious stance as cyclical sectors experienced the biggest losses, while defensive sectors such as utilities, healthcare and consumer staples limited losses.
Wal-Mart Stores and Coca-Cola helped the Dow to limit losses. Wal-Mart rose 0.2 per cent to $52.06, while Coca-Cola was up 1.5 per cent to $64.91.
Gasoline and heating oil futures each gained about 3.5 per cent to $3. The S&P’s materials index dropped 2.3 per cent while the industrials dropped 2.2 per cent.
According to AAA, the national average price of regular unleaded gasoline is currently at $3.35 per gallon.