For the past week, investors wondered what would break stocks out of their cycle of going down as oil prices went up. On Friday, they got their answer. The problem is that the economy added only 32,000 jobs in July, far fewer than economists expected. That broke the cycle by sending stocks even lower.
Now investors are faced with a confluence of bad news that will likely send prices down further. Combined with oil prices still hovering near $44 a barrel, investors sold off heavily for a second straight day, worried that inflation and slow job growth would interrupt the economic recovery for a sustained length of time.
Some analysts said the oil prices could reach $50 a barrel or more before heading lower.
And the economy's "soft spot" in June, as described by Federal Reserve Chairman Alan Greenspan, could turn out to be a disturbing trend instead of a singular aberration.
The 32,000 nonfarm payroll jobs added in July were far less than the 235,000 economists had expected, according to CBS MarketWatch.
Payroll growth in May and June was revised lower by a cumulative 61,000, as well. The unemployment rate fell to 5.5 percent from 5.6 percent.
"This was the report for the month. This is what everybody had pinned their hopes on to really stabilize the market, so to have this kicked out from underneath us really creates some serious issues," Paul Mendelsohn, chief investment strategist at Windham Financial Services, told CBS MarketWatch.com.
Having taken out all critical support points in the major indexes, Mendelsohn said, things could "get really nasty" from this point on.
"This is a disaster shaping up in here," he said.
There's another worry. Not only is job growth suddenly slowing. But the jobs being created are usually paying less than the jobs lost, reports CBS News Correspondent Anthony Mason.
Among laid-off employees who found new work over the past year, 57 percent are earning less than in their previous jobs.
Says Mark Zandi from www.economy.com, "We've been creating jobs, predominantly low paying jobs. That was the case a year ago. That was the case 6 months ago. That's the case today."
Jerry Nowadzky knows. After being laid off as a machinist he found work at a supermarket stocking shelves on the overnight shift.
Says Nowadzky, "I make about half as much working at the grocery store as what I used to make at the factory jobs."
Nowadzsky's first factory job was outsourced to China. He found another — which went to Mexico. He then took computer courses to try to improve his skills, but he isn't finding much in the classifieds.
He says, "Right now there isn't a lot out there. And what is out there doesn't really pay a whole lot either."
So while fewer jobs are being created — and, most likely, consumer spending will be constrained by the scarcity of new work — consumers will pay more not only at the pump, but also for many other goods that must be shipped to stores, since companies will likely attempt to pass on increased fuel costs on as well.
Consumer spending, of course, is one of the engines of the economy. And that has Wall Street very nervous.
"This isn't a recession, it's a slowdown at best," said Bob MacIntosh, chief economist for Eaton Vance in Boston, a private investment firm. "But this is frustratingly weak growth, and combined with oil prices where they are, there's a lot of uncertainty that will weigh on the markets for a while, possibly until the elections. And when there's uncertainty, there's selling."
That was reflected in the markets this week. The Dow Jones industrial average plunged 163.48 on Thursday due to a sharp spike in oil prices.
"There's no question that this price level hurts the economy and slows things down," said Lincoln Anderson, chief investment officer at LPL Financial Services in Boston. "I'd say it clips real GDP (gross domestic product) growth by a percentage point. Not enough to knock us back into recession, but a significant deadweight loss."
The Dow index then fell another 147.70 points on Friday after the weak jobs report, putting its decline for the week at 3.2 percent, its worst weekly loss since the second week of March. The Nasdaq composite index tumbled 5.6 percent for the week, and the Standard & Poor's 500 index was down 3.4 percent — the worst weekly performance of the year for both indexes.
Since May, the economy has created 318,000 jobs, while economists and investors had been expecting 710,000 for the past three months.
"It's a terrible number," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. "The soft spot that Greenspan was talking about just a few weeks ago looks a lot bigger now. That really puts the Fed's credibility at stake."
The Federal Reserve's meeting on Tuesday will likely determine the short-term direction of the market for at least the rest of the month, analysts said. The Fed had been widely expected to raise the overnight bank lending rate by a quarter percentage point, to 1.5 percent, as part of its policy to gradually but firmly increase borrowing costs through the rest of the year.
The current situation now puts the Fed between a rock and a hard place. Raising rates now would send a signal that central bankers are prepared to keep inflation from accelerating, but it could come at the cost of further slowing the economy and job growth. By forgoing a rate hike Tuesday, Greenspan and his colleagues could help the economy generate more growth, but then oil-induced inflation becomes more of a risk.
But the question isn't just about what's best for the economy. What would be best for Wall Street?
"I think holding off on the rate hike would certainly get stocks moving in the other direction," Ablin said. "The economy just isn't growing as strong as we thought. Give it a little more time before you send rates higher and you'll get things turned around."
Others aren't so sure, however, saying that while oil prices and job creation are important, the economy remains fundamentally sound. Once the initial shock wears off, stocks should find a bottom then begin another climb to new heights.
"I know optimism's unfashionable, but I'm pretty optimistic that this will work to our benefit," Anderson said. "I think companies are holding off on hiring to pump up their bottom line. That could bring in third quarter earnings higher than expected, and that, along with the elections, could turn stocks around pretty quickly."
For the short-term, however, the market will hinge on Tuesday's Fed meeting, and investors are hoping Greenspan and his peers will give a tired market something to be happy about.