Stocks Fall on Confidence Report, Oil Price

Stocks headed lower Friday as after a report showed U.S. consumer sentiment, a key to consumer spending, fell more than expected in August, suggesting higher gasoline prices are eating into Americans' morale and household budgets.

The Dow Jones industrial average (search) fell 53.34 points, or 0.51 percent, to end at 10,397.29. The Standard & Poor's 500 index (search) slipped 7.27 points, or 0.60 percent, to finish at 1,205.10. And the technology-laced Nasdaq Composite Index (search) dropped 13.60 points, or 0.64 percent, to 2,120.77.

For the week, the blue-chip Dow average was down 1.5 percent, while the broad S&P 500 was down 1.2 percent, and the Nasdaq was down 0.7 percent for the week.

"Consumers are beginning to feel the impact of higher oil prices in their pockets," said Larry Peruzzi, senior equity trader at The Boston Co. Asset Management, with $68 billion in stocks. "Less confidence means less spending and no wonder we have been seeing shares of retailers and banks faltering."

Wall Street was rattled after the University of Michigan's (search) consumer sentiment index for August fell to 89.1 from a July reading of 96.5, well below economists' expectations of 92.5.

"It is not much of a surprise that the index came in weaker than expected. Clearly this index is going to be affected more and more by the higher price of energy," said Joseph Battipaglia, chief investment officer at Ryan, Beck & Co. "The market is trading lower, and there is a significant headwind coming from higher energy prices."

Crude oil futures slid from their record highs earlier this week as it became clearer that Hurricane Katrina was unlikely to disrupt U.S. refineries in the Gulf of Mexico. A barrel of light crude settled at $66.13, down $1.36, on the New York Mercantile Exchange (search).

Yet there may be little reason for oil prices to drop substantially lower in the near term, and one analyst said the market could be headed still lower as a result.

"Right now, for the short term, the market is probably going to continue on this path for a little bit," said Arthur Hogan, chief market analyst at Jefferies & Co. "Unless we get some dissipation of headwinds facing the market, we have a tough running ahead."

On Nasdaq, shares of home furnishings retailer Bed Bath & Beyond shed 1.7 percent, or 73 cents, to $41.27.

Federal Reserve Chairman Alan Greenspan (search) told a symposium in Jackson Hole, Wyoming, that the central bank is increasingly focused on rising prices for assets like houses and stocks, which fueled investors' worries that more interest-rate hikes are in the offing. That hit shares of home builders like D.R. Horton Inc. and other stocks sensitive to interest rates, such as banks and mortgage lenders.

The Standard & Poor's Retailing Index fell 0.9 percent, and the Dow Jones U.S. home-builders index fell 1.5 percent to 941.13, just above a two-month low hit earlier.

Home Depot (HD) , the world's biggest home improvement retailer, fell 0.9 percent, or 37 cents, to $39.81 and weighed on the blue-chip Dow average. Shares of rival Lowe's Cos. Inc. (LOW) slid 1.6 percent, or $1.01, to $63.18. Both trade on the New York Stock Exchange.

In the home construction sector, shares of D.R. Horton, the No. 1 U.S. home builder, dropped 2.3 percent, or 81 cents, to $34.40. The stock of Countrywide Financial Corp. (CFO), the largest U.S. home mortgage lender, declined 0.5 percent, or 18 cents, to $32.93.

Boeing Co. (BA) was the biggest drag on the Dow, falling 1.3 percent, or 90 cents, to $66.31 a day after its machinists' union criticized the aircraft maker's initial proposal for a new contract.

Merck & Co. (MRK) helped drag the Dow lower, with shares closing down 11 cents at $27.66 after the drug maker said it may settle part of the Vioxx litigation after the first case drummed up a jury award of more than $250 million. Merck, which previously said it would fight each case over Vioxx's harmful side effects, added that it does not plan on a global settlement.

Merck shares were higher in premarket activity, but recently dropped 8 cents to $27.69, even though it said it might settle part of the Vioxx litigation after the first case drummed up a jury award of more than $250 million. The company previously said it would fight each case over Vioxx's harmful side effects, but added that it does not plan on a global settlement.

Bonds rose, with the yield on the 10-year Treasury note falling to 4.15 percent from 4.16 percent on Thursday. The U.S. dollar was mixed against other major currencies in European trading, while gold prices declined slightly.

Investors also were shaken following a pair of downgrades on Petco Animal Supplies Inc. (PETC) Late Thursday, Petco blamed rising gas prices that have cut into consumer spending for a 7 percent drop in second-quarter income. Analysts at Piper Jaffray and JPMorgan then reduced Petco to neutral ratings, citing the company's lowered outlook. Petco dropped $3.56, or 13.9 percent, to $21.99.

Elsewhere, Pixar Animation Studios (PIXR) saw its shares tumble after a newspaper reported the
Securities and Exchange Commissionopened an informal inquiry into the movie studio, which has said higher-than-expected DVD returns caused it to miss second-quarter forecasts. Pixar fell $1.01 to $41.99.

Hewlett-Packard Co. (HPQ) announced plans to repurchase an additional $4 billion of its stock. The company has bought back $2.1 billion of shares during the first three quarters of its fiscal year. HP shares rose 11 cents to $27.01.

The Russell 2000 index of smaller companies fell 9.06, or 1.38 percent, to 648.64, and dropped into negative territory for the year. It closed the week down 3.87, or 0.59 percent, at 648.64.

Overseas, Japan's Nikkei stock average rose 0.28 percent. Britain's FTSE 100 fell 0.53 percent, Germany's DAX index lost 1.49 percent, and France's CAC-40 was 0.82 percent lower.

The Dow Jones Wilshire 5000 Composite Index — a free-float weighted index that measures 5,000 U.S. based companies — ended the week at 12,042.41, down 125.5 points from last week.

Reuters and the Associated Press contributed to this report.