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June 29, 2022

Dow drops 800 points, enters correction, after crude prices reach highest level since 2008

Stocks sank on Monday, with the Dow Jones Industrial Average falling nearly 800 points, after crude oil reached its highest level since 2008 and is expected to continue to push higher.

The S&P 500 lost nearly 3% on Monday, posting its worst daily loss since October 2020. It lost $1.08 trillion in market value, and a total of $4.76 trillion for the year, according to S&P Dow Jones Indices.

They both entered what’s called a correction, when a drop is more than 10% from a recent high. It’s the Dow’s first close into correction territory since Feb. 27, 2020.

The Nasdaq also fell more than 3%, entering a bear market. It’s down more than 20% from its record high in November.

So far this year, all three indexes fell every month, in January, February and now into March.

“The fact that the Dow is now in correction territory says a lot about how much risk to the economy investors see,” Barron’s reports. “The index is mainly comprised of mature, economically sensitive, or cyclical, stocks. Those stocks are more reliant on a strong economy, so when they have a rough stretch, it usually signifies concern about the big-picture outlook.”

After entering a correction, the market can go two ways, Barron’s points out: report gains or losses. Gains are seen the majority of the time, with an average gain over the following 12 months of a close in correction being around 8.7%, it notes.

But “losses in the year after a close in correction territory tend to happen when markets are anticipating a recession,” which appears to be the case now after the U.S. has already experienced a 40-year inflation high in President Joe Biden’s first year in office. “In late June 2008, the Dow closed in correction territory and went on to lose 26% in the following year because markets were still pricing in the damage wrought brought on by the 2008-2009 financial crisis,” Barron’s reports.

The market tanked after the WTI Crude hit $130 a barrel Sunday night, dropping to $121 a barrel Monday morning, and Brent Crude surpassed $123 a barrel.

“The market is pricing in a 3 million barrel per day disruption,” Andrew Lipow of Houston-based Lipow Oil Associates LLC, told The Center Square. “A complete ban on Russian exports will lead to $150+ per barrel.”

Analysts at Bank of America predict that if the majority of Russian oil exports are cut off, there could be a 5 million barrel per day shortfall, causing crude to hit $200 a barrel, Reuters reported.

If Russian oil supply faces continued disruption, Brent could end the year at $185 per barrel, JPMorgan analysts forecasted, according to Bloomberg News.

As gas prices continue to rise, higher energy prices will only worsen inflation in the U.S., surpassing the already record 40-year high.

This article was originally posted on Dow drops 800 points, enters correction, after crude prices reach highest level since 2008