Stocks fall after oil prices spike near a 2-year high and reports suggest a slowing US economy

U.S. stocks tumbled Friday as investors confronted a troubling economic scenario combining job losses with surging oil prices, raising fears of stagflation that sent markets into a tailspin.

The S&P 500 dropped 1% after the Labor Department reported that U.S. employers cut more jobs than they created last month, while oil prices simultaneously jumped to their highest level in nearly two years due to escalating tensions in the Middle East. The Dow Jones Industrial Average fell 570 points, or 1.2%, while the Nasdaq composite declined 0.8% by midday trading.

“You can’t sugarcoat this report,” said Brian Jacobsen, chief economic strategist at Annex Wealth Management. “A negative payrolls number combined with a big jump in oil prices will have traders worrying about stagflation risks.”

The market’s reaction underscores growing concerns about stagflation—an economic condition characterized by stagnant growth coupled with high inflation. This combination poses a particularly difficult challenge for policymakers, as conventional tools to address one problem often exacerbate the other.

Adding to investor anxiety, a separate report showed U.S. retail sales in January fell short of economists’ expectations, raising concerns that consumer spending, the primary driver of U.S. economic growth, may be reaching its limits.

The Federal Reserve now faces a precarious balancing act. While the central bank typically cuts interest rates to stimulate a weakening economy, such moves could further fuel inflation at a time when oil prices are pushing costs higher across the economy. The Fed had already indicated plans for multiple rate cuts this year after implementing several reductions in 2023, but rising inflation could force a reassessment of that strategy.

Oil markets continued their dramatic ascent, with Brent crude, the international benchmark, jumping 6.8% to $91.21 per barrel—its highest level since April 2024. U.S. benchmark West Texas Intermediate crude surged even more dramatically, climbing 10.2% to $89.30 per barrel. These price increases mark a substantial rise from levels around $70 just a week ago.

The oil price surge stems directly from the expanding conflict in the Middle East, which now threatens areas critical to global energy production and transportation. Market watchers are particularly concerned about the Strait of Hormuz, a narrow waterway off Iran’s coast through which approximately one-fifth of the world’s oil supply typically passes. Some analysts warn that if oil prices reach and sustain levels around $100 per barrel, it could pose a significant threat to global economic stability.

While U.S. markets have historically rebounded relatively quickly following geopolitical conflicts in the Middle East, the current situation’s unpredictability has led to unusually volatile trading sessions. Monday’s session, for instance, saw the S&P 500 drop 1.2% at the opening bell before recovering to end the day with a slight gain.

President Donald Trump’s recent call for an “unconditional surrender” from Iran has further complicated the outlook, seemingly ruling out diplomatic negotiations to de-escalate tensions.

The bond market reflected the conflicting economic signals, with the yield on the 10-year Treasury initially rising toward 4.19% before settling at 4.13%, still notably higher than the 3.97% level from a week earlier.

Smaller companies, which are often more sensitive to economic downturns and rising borrowing costs, felt the brunt of the selloff. The Russell 2000 index of small-cap stocks fell a market-leading 1.9%. Companies with high fuel expenses were particularly hard hit, with Old Dominion Freight Line dropping 8.2%, Norwegian Cruise Line Holdings falling 5.1%, and Southwest Airlines losing 6.9%.

Among the few bright spots, Costco Wholesale climbed 1.5% after reporting stronger-than-expected quarterly profits, benefiting from a later Lunar New Year that boosted revenue at its international warehouses.

European markets followed Wall Street lower, with France’s CAC 40 falling 0.9% and Germany’s DAX losing 1.1%. Asian markets fared better, with Hong Kong’s Hang Seng jumping 1.7% and Japan’s Nikkei 225 adding 0.6%.

As markets close out a tumultuous week, investors remain on edge, bracing for further volatility as geopolitical tensions and economic concerns continue to intertwine in what has become an increasingly complex global financial landscape.