Oil, CPI may give stocks a rough ride

By Walker Simon

NEW YORK (Reuters) - Wall Street may be in for a rocky ride this week as investors recall Friday's triple threat -- oil at a record above $139 a barrel, a troubling unemployment report and the stock market's 3 percent drop -- while they await inflation data for May.

The Consumer Price Index is set for release on Friday.

Stocks had been headed for a weekly gain after Thursday's rally, the strongest in more than a month. But optimism evaporated early Friday when the government said the unemployment rate scored its sharpest one-month spike in 22 years in May. The Labor Department said U.S. nonfarm payrolls lost 49,000 jobs.

For the week, the Dow Jones industrial average .DJI fell 3.4 percent and the Standard and Poor's 500 index .SPX tumbled 2.8 percent. The Nasdaq .IXIC dropped 1.9 percent.

On Friday afternoon, stocks accelerated their slide when oil soared past $139 a barrel. The Dow closed down almost 400 points. Skyrocketing oil prices and the stock market's sharp sell-off triggered memories of 1970s-style stagflation, when prices soared but economic growth was almost nil and the stock market was practically dormant.

"Stagflation is really a nasty word," said Victor Pugliese, director of listed equity trading at Broadpoint Securities in San Francisco. "The last time we had it, we had a terrible market."

NIGHTMARE ON WALL STREET

Stocks went almost nowhere in the 1970s when oil prices surged due to the Yom Kippur War and the Arab oil embargo in October 1973, and at the decade's end, with the U.S. hostage crisis in Iran that began in early November 1979.

In early 1973, the Dow broke the 1,000 mark for the first time -- only to end the year at 850.86. The Dow rose above the 1,000 milestone again in 1976 and managed to close out the year at 1,004.65. It would take the Dow more than four years, until sometime in 1981, to poke its head above 1,000 again. The market's stumbling block: Runaway oil prices and inflation took a bite out of the U.S. economy with banks' prime interest rate hitting 21.5 percent in December 1980.

"There is a lot of concern over how high the oil price can go," said John Praveen, chief investment strategist at Prudential International Investments Advisers LLC in Newark, New Jersey. "Stagflation clearly is the biggest fear with a negative impact on economic growth and the consumer."

WILL OIL HIT $150?

Oil roared to an all-time high Friday on the weaker dollar, tensions between Israel and Iran, and a Morgan Stanley forecast that falling U.S. crude stockpiles could push oil to $150 a barrel by July 4. That date marks the U.S. Independence Day holiday and the start of a long weekend for most Americans -- a time when demand for gasoline is usually high and airports are crowded.

During the New York Mercantile Exchange's regular session on Friday, U.S. crude oil for July delivery CLN8 climbed to an intraday record of $139.01 -- overtaking the previous record of $135.09 set on May 22. NYMEX July crude also settled at a record $138.54 a barrel, up $10.75, or 8.41 percent for the day. And that surge followed Thursday's gain of $5.49.

In Friday's post-settlement trading, NYMEX July crude shot even higher -- to a record $139.12.

The jump in the U.S. unemployment rate to 5.5 percent in May from 5.0 percent in April and Friday's spike in oil prices to a record dominated the weekend's headlines.