The markets opened lower on Friday and then just kept falling, hit by remarkable rise in the price of crude oil and a spike in the unemployment rate.
Wall Street suffered its worst losses in more than two months.
The Dow Jones industrials plunged more than 400 points on fears about high energy prices and a continued economic slowdown, raw nerves that have pestered investors for months.
“The market is meeting its worst fears right now,” said Quincy Krosby, chief investment strategist at The Hartford, a financial services firm.
At the close, the Dow was off 3.13 percent, at 394.64. The broad-based Standard & Poor’s 500-stock index fell 43.37 points, or 3 percent, to 1,360.68, and the technology-laden Nasdaq composite index declined 75.38 points, or 2.96 percent, to 2,474.56. Shares opened lower after the government reported that the unemployment rate in May had its highest monthly increase in 22 years. But the decline accelerated as investors confronted a $10.75 jump in the price of crude oil, the biggest one-day climb ever.
“Oil prices have reached the tipping point,” said Richard Sparks, an analyst at Schaeffer’s Investment Research. “Prices have rallied for a good two months but now it’s really weighing on the market.”
Wall Street has run into choppy waters over the last two weeks after a period of relative calm. Friday’s decline marked a return to the triple-digit collapses of February and March, when the market was rocked by the Bear Stearns bailout and significant interest rate cuts from the Federal Reserve.
The last time the Dow fell this far was March 19, a day after the Fed slashed rates by three-quarters of a point.
On Friday, the blue-chip index was dragged down by shares of American International Group, the big insurer, which stumbled after accusations that the company may have overstated the value of contracts tied to subprime mortgages.
Shares of A.I.G. closed down $2.48, or nearly 6 percent, to an 11-year low of $33.93.
Shares of financial firms and companies that depend on discretionary spending were the hardest hit, as investors worried that the weak labor market is likely to raise anxieties among some Americans and put a pall on spending habits. Friday’s report from the Labor Department said that the economy lost jobs for the fifth straight month and the unemployment rate surged to 5.5 percent in May from 5 percent.
Investors are also worried that high energy prices will further slow the economy.
“If oil prices stay this high, you’re going to have to reexamine your estimates for G.D.P., inflation and consumers’ ability to spend outside of non-discretionary items,” Ms. Krosby said. “This has all of the elements of an investor’s worst-case scenario.”
Oil prices surged almost 8 percent, to $138.54 a barrel after a senior Israeli politician raised the specter of an attack on Iran and the dollar fell against the euro.
“As soon as that news hit the tape, oil spiked about $6,” said David Kovacs, an investment strategist at Turner Investment Partners.
Prices were buoyed further by a report from Morgan Stanley that predicted oil would reach $150 a barrel by July 4 because of higher demand in Asia. Shares of General Motors, whose fortunes can depend on oil prices, fell more than 4 percent, to a record low.
Mr. Sparks added the market is also taking a hit from a string of bad news that came out earlier this week: Standard & Poor’s downgrading of Lehman Brothers, Merrill Lynch and Morgan Stanley; the ousting of Wachovia’s chairman.
“All of this has culminated and it’s bringing the boogeyman back out of the closet,” he said.
Bond prices jumped on Friday as investors sought the safety of Treasuries in the volatile market. The dollar declined against other currencies, a move that makes each barrel of oil more expensive. Gold prices rose.
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