Dow drops 400 after trimming an early plunge of 1,200 as oil prices climb even higher

Specialists Meric Greenbaum, left, and Alex Weitzman work on the floor of the New York Stock Exchange. (AP Photo/Richard Drew)

A sell-off for stocks wrapped around the world and hit Wall Street Tuesday, while oil prices climbed even higher on worries about the widening war with Iran. But the big moves that rocked markets in the morning eased substantially as the day progressed.

By the end of trading, the S&P 500 had sunk 0.9 per cent. That would be a solid loss on a typical day, but the index had been down as much as 2.5 per cent in the morning because of worries that the war may do more sustained damage to the economy  than feared.

The Dow Jones Industrial Average dropped 403 points, or 0.8 per cent, after plunging more than 1,200 points earlier in the morning. The Nasdaq composite pared its loss to 1 per cent.

It was just a day earlier  that U.S. stocks opened the morning with a sharp loss, only to recover all of it and end the day with a tiny gain. Helping to drive that rebound was a record showing that past wars and conflicts in the Middle East have not usually meant long-term pain for U.S. stocks.

But that was with the caveat that oil prices did not jump too high, like above US$100 per barrel. On Tuesday, oil prices rose again and raised more alarms. The price for a barrel of Brent crude, the international standard, briefly leaped above US$84.

The jump lessened through the day, though, which helped moderate the losses for stocks. Brent settled at US$81.40, up 4.7 per cent. A barrel of benchmark U.S. crude rose 4.7 per cent to US$74.56.

The moves showed oil prices, and how much they’re set to worsen inflation, are among the central fears for investors. More expensive fuel will mean less money for U.S. and other households to spend. It would also raise expenses for companies worldwide, which would likewise hurt their profits. And corporate profits are the lifeblood of stock markets.

Tuesday’s climb for oil prices came after Iran struck the U.S. Embassy in Saudi Arabia, part of a widening of targets that also includes areas critical to the world’s oil and natural gas production. Worries are particularly high about the Strait of Hormuz off the coast of Iran, a narrow passageway where roughly a fifth of the world’s oil passes.

Iranian Brig. Gen. Ebrahim Jabbari, an adviser to the paramilitary Revolutionary Guard, vowed that any ships that passed through the strait would be set on fire.

The fears about oil prices ebbed a bit later in the day as President Donald Trump said the U.S. Navy could begin escorting tankers through the strait, “if necessary,” to “ensure the FREE FLOW of ENERGY to the WORLD.”

Making things uncertain for markets is the question about how long this war may continue.

A major attack by the United States and Israel has already killed Iranian Supreme Leader Ayatollah Ali Khamenei, but Trump said late Monday night on his social media network, “Wars can be fought ‘forever,’ and very successfully” with the supply of munitions that the United States possesses.

Some professional investors said again Tuesday they don’t think this is the beginning of a long-term down market and that stocks could rebound if the war doesn’t last that long. But they acknowledge it could take a while for that to become clear, and Tuesday’s swings for markets show how uncertain things are.

Tuesday’s sell-off started in Asia, where the Kospi stock index in South Korea, a big energy importer, plunged 7.2 per cent as markets reopened after a holiday on Monday. That was its worst day since two summers ago, and it had been setting records recently.

Tokyo’s Nikkei 225 dropped 3.1 per cent, even as analysts said Japan has a sizable stockpile lasting more than 200 days. In Europe, where prices for natural gas have soared because of the war, France’s CAC 40 lost 3.5 per cent.

On Wall Street, nearly three out of every four stocks within the S&P 500 dropped. Unlike a day before, influential Big Tech stocks weren’t able to prop up indexes, and Nvidia fell 1.3 per cent.

Among the winners on Wall Street was Target, which rose 6.7 per cent after the retailer reported a better profit for the latest quarter than analysts expected.

All told, the S&P 500 fell 64.99 points to 6,816.63. The Dow Jones Industrial Average dropped 403.51 to 48,501.27, and the Nasdaq composite sank 232.17 to 22,516.69.

In the bond market, Treasury yields leaped in the morning with worries about inflation. The yield on the 10-year Treasury briefly rose above 4.10 per cent before pulling back just below 4.06 per cent. It was at 4.05 per cent late Monday and just 3.97 per cent on Friday.

Higher yields can make it more expensive for U.S. households and businesses to borrow money, affecting everything from mortgages to bond issuances. They also put downward pressure on prices for stocks and all kinds of other investments.

When Treasurys are paying more in interest, they can also undercut the price of gold, which pays its investors nothing. Gold fell 3.5 per cent Tuesday to settle at US$5,123.70 per ounce, halting a strong run that had taken it above US$5,300 as investors looked for safer places to park their money.

High inflation could also tie the Federal Reserve’s hands  and keep it from cutting interest rates. The Fed lowered rates several times last year and indicated more cuts were to come in 2026. That would help boost the economy and job market, but lower rates can also worsen inflation.

Traders are now pushing back their forecasts further into the summer for when the Fed could resume cutting rates, according to data from CME Group. That’s even though Trump has been calling for Fed officials in angry and personal terms to cut rates now.

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Stan Choe, The Associated Press. AP Business Writers Yuri Kageyama and Matt Ott contributed.