Stocks retreated Monday as continuing violence in the Middle East and a resulting jump in oil prices reminded investors that the market could face problems beyond the recession.
The collapse of a Dow Chemical joint venture, meanwhile, intensified Wall Street's economic worries.
Investors remained cautious in a holiday-shortened week, unwilling to make many big bets in the final three days of trading for 2008. Israel's escalating attacks against Gaza's Hamas rulers made traders more hesitant to buy.
The tensions pushed oil prices above $40 a barrel during the session, with crude closing up $2.31 at $40.02 a barrel on the New York Mercantile Exchange. Oil had fallen more than $100 from its peak of $147.27 a barrel on July 11 as a slowing economy curbed demand, but the fighting in Gaza raised the possibility of supply disruptions that could send prices climbing again.
Todd Leone, managing director of equity trading at Cowen & Co., said trading volume is extremely light and that is contributing to the market's swings. Low volume tends to skew price movements.
"What's going on in Israel didn't read well over the weekend," Leone said. "Beyond that, it is an incredibly quiet session. It's really not taking much to move the markets."
Investors also digested a potential blow to dealmaking on Wall Street. On Sunday, Kuwait's government canceled its $17.4 billion K-Dow Petrochemicals joint venture with Dow Chemical, saying it was "very risky" because of the global financial crisis and low oil prices. The joint venture was set to begin Thursday.
Rohm & Haas maintains that its proposed $15.3 billion takeover by Dow Chemical won't be affected by Dow's substantial loss of income from the venture. But investors punished shares, driving them down $9.60, or 15.1%, to $53.96. Dow Chemical shares lost $3.15, or 16.3%, to $15.35.
The Dow Jones industrial average fell 31.62, or 0.37%, to 8,483.93.
Broader indexes also declined. The Standard & Poor's 500 index fell 3.38, or 0.39%, to 869.42; the Nasdaq composite index fell 19.92, or 1.30%, to 1,510.32.
Declining issues were ahead of advancers by nearly 4 to 3 on the New York Stock Exchange, where consolidated volume came to an extremely 1.40 billion shares, down from 1.71 billion on Friday.
Bond prices rose. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 2.10% from 2.14% late Friday. The yield on the three-month T-bill, in great demand because it is considered one of the safest investments, rose to 0.03% from 0.01% late Friday.
The dollar was lower against other major currencies, while gold prices rose.
Wall Street has largely written off the final three trading days of 2008, the worst year since Herbert Hoover was president. The Dow has fallen 36%, the biggest drop since 1931 when the Great Depression sent stocks reeling 40.6%. And the Standard & Poor's 500 index is set to record the biggest drop since its creation in 1957. The index of America's biggest companies is down 40.8% for the year.
Alexander Paris, economist and market analyst for Chicago-based Barrington Research, said investors had more reasons to sell on Monday rather than scoop up stocks. For instance, he said some investors might be selling for tax purposes or positioning ahead of economic data to be released later this week, including the Institute for Supply Management's assessment of the manufacturing sector, scheduled for Friday.
"When you have a quiet week, things have a bigger impact on the market," he said. "Everybody likes to have a headline as to what caused the market to move. But, there's still the broader concern that the fourth quarter will be the worst on record for economic growth since 1982."
Dave Rovelli, managing director of trading at brokerage Canaccord Adams, said investors will be waiting to make big moves until after the Jan. 20 inauguration of President-elect Barack Obama. Wall Street is eager for details on his proposed stimulus package for the economy.
"No one is going to do anything until the New Year," he said.
However, if companies release earnings warnings early in January, or if the first wave of fourth-quarter reports are disappointing, the market could see a return of heavy selling. Investors will be focusing on any word from companies deemed critical to the economy, especially from the beleaguered financial and retail sectors.
Investors will also be looking for more insight this week into how retailers fared after the weak Christmas selling season. Stores have slashed prices even further to entice post-holiday shoppers but with many consumers nervous about the economy they're reluctant to spend. That's a troubling prospect for investors, since consumer spending accounts for more than two-thirds of U.S. economic activity.
In other corporate news, billionaire investor Kirk Kerkorian sold his remaining shares in Ford Motor Co., according to a spokeswoman for his investment company Tracinda Corp. Kerkorian's jettisoning of Ford comes just six months after Tracinda boosted its stake in the Dearborn, Michigan-based automaker to 6.49%.
Ford shares fell 6 cents, or 2.6%, to $2.23.
The Russell 2000 index of smaller companies fell 10.62, or 2.23%, to 466.15.
Overseas, Japan's Nikkei stock average rose 0.09%. In afternoon trading, Britain's FTSE 100 rose 2.44%, Germany's DAX index rose 1.63%, and France's CAC-40 rose 0.47%.