Oil gets markets off to worst first half since 2002

Stocks had an abysmal first half of the year, and analysts see no relief in sight as long as the spiraling price of crude oil continues to suck life out of the economy.

One investment strategist said the surge in crude prices - to $140 a barrel yesterday from about $70 a year ago - already may have unleashed a recession that won't hit until next year.

"There is absolutely nothing you can do about it," David Kovacs, a chief investment officer at Turner Investment Partners Inc., of Berwyn, said yesterday.

So far this year, the U.S. economy has continued to grow, though feebly. But that has meant little to the stock market, which has not had such a bad start since 2002 - right after a recession and the Sept. 11 terrorist attacks.

Beyond high fuel prices, a long list of economic woes is weighing on stocks - including inflation, the weak dollar, five straight months of job losses, uncertainty over how far average housing prices will fall, continued credit turmoil, and anticipated weakness in corporate earnings.

The Standard & Poor's 500 stock index, which provides a broad barometer of the equity markets and the economy, has lost nearly 13 percent of its value this year, led by banks, bond insurers and mortgage lenders.

But losses have been widespread. Only 138 S&P 500 stocks were up for the year, as of yesterday. Dominating the list of strongest performers are natural gas drillers, coal companies, and other commodities producers.

In contrast to stocks, commodities had their best first half in 35 years, according to Bloomberg News.

Inflation caused in large part by soaring prices for commodities, such as food, energy and metals, has put the Federal Reserve in a bind.

The fear is that it will not be able to spur the economy with further cuts in short-term interest rates without causing even worse inflation. Policymakers "haven't had this difficult set of decisions, of this magnitude, since the early '80s," said Gordon B. Fowler Jr., chief investment officer at Glenmede Trust Co., of Philadelphia.

Locally, the best performer among stocks that started 2008 trading for at least $5 was Penn Virginia Corp., which has gained 73 percent on news that production from a natural gas well in a potentially gas-rich area of East Texas surpassed expectations.

Yesterday, the shares gained $5.46, or 7.80 percent, to close at $75.42 on the New York Stock Exchange.

However, merely being in the energy business is not enough to please Wall Street.

Sunoco Inc., the largest oil refiner in the Northeast, is one of the biggest losers locally among large-capitalization companies.

Shares in the Philadelphia company are down 44 percent this year because its profits are getting squeezed between rising prices for crude oil and slumping demand for fuel.

Sunoco is joined by other independent refiners and marketers in reporting similar depressed amounts. Yesterday, Sunoco's shares gained $3.21, or 8.56 percent, on speculation that it might sell its Tulsa, Okla., refinery for $1 billion, Bloomberg News reported.

The worst-performing stock for the year so far in the Philadelphia region was Radian Group Inc., a mortgage and bond insurer based in Center City. Radian is down 88 percent because of rising foreclosure rates and doubts about when it can return to profitability.

Stock market bull Jeremy J. Siegel, a professor of finance at the University of Pennsylvania's Wharton School, said that he still believed stocks were a good long-term investment, but that they were in for a tough time in the short term.

Siegel said some financial stocks, such as bond insurers, were permanently damaged. Others, including some commercial banks, have been beaten down too far, he said.

"I think we will be looking back a year from now and seeing these as very cheap prices," he said.

Siegel said he did not know whether that was true of Wachovia Corp., the biggest bank in the Philadelphia region and one of the worst-performing large-cap financial stocks. Its shares closed yesterday at $15.53, down 59 percent year-to-date.

Despite this year's financial turmoil, including the unprecedented move by the Federal Reserve to bail out debt issued by the New York investment bank Bear Stearns Cos. Inc., analysts yesterday kept coming back to oil.

They anticipate a breaking point, when oil prices reach a level that causes an extreme reaction in the economy, perhaps even global recession.

On the other hand, if it turns out that oil prices are being held up by a speculative bubble that pops, the picture will change dramatically.

"Let's say oil collapses, if it goes back to $100, all bets are off," said Kovacs, at Turner Investment. "The market will rally."

2008 first-half changes for selected industry sectors in the Standard & Poor's 500 index.

S&P sector Index change

Energy +8.1%

Materials* +0.2

Real estate** -4.5

Computer -10.5

hardware

Pharmaceuticals -11.1

Retailing -13.9

Household goods -15.5

Telecommunications

-18.9

Automotive -31.0

Banking -37.6

*Primarily chemicals, metals and mining companies.

**Property developers and operators.

SOURCE: Bloomberg News