Oil at $111 Sends Stocks Into a Slide and Small Caps Into Correction
The S&P 500 fell 1.5% to 6,506.48 and the Russell 2000 dropped into correction territory as crude rose roughly 66% in little more than a week following the closure of the Strait of Hormuz.
NEW YORK — Stocks fell sharply on Friday as the conflict in the Middle East showed no sign of easing and crude oil extended one of the fastest price spikes on record.
The Dow Jones Industrial Average dropped 443.96 points, or 0.96%, to 45,577.47. The S&P 500 fell 1.51% to 6,506.48, and the Nasdaq Composite lost 2.01% to close at 21,647.61. The small-cap Russell 2000 slid more than 2% and entered correction territory, down 10% from its recent high.
The oil math
Crude prices have risen roughly 66% since fighting began at the end of February, from the mid-$60s to above $111 a barrel, after Iran's closure of the Strait of Hormuz disrupted a waterway that carries about a fifth of global petroleum exports. It is the fastest such move in more than four decades.
Equity markets translate an oil shock through three channels: input costs for industrials and transport, discretionary income for consumer companies, and the discount rate, since higher energy prices feed inflation expectations and long-term interest rates.
Small caps take it worst
The Russell 2000's fall into correction is the clearest expression of that arithmetic. Small companies carry more floating-rate debt, have less pricing power to pass on fuel surcharges, and generate a larger share of revenue domestically, where the consumer squeeze lands.
Energy shares, by contrast, rallied hard. The sector would go on to become the year's best performer by a wide margin.
What investors were watching
Two questions dominated trading desks: how quickly alternative shipping routes could absorb displaced barrels, and whether the Federal Reserve would treat the shock as transitory. The answer to the first turned out to be "partly, over months." The answer to the second was that the Fed did nothing at all — holding rates steady at every meeting since, while three of its officials began voting to raise them.
