This is why the Dow fell more than 200 points on Friday while oil prices surged - USA TODAY

Jessica Menton USA TODAY

Published 5:09 PM EST Jan 3, 2020

Stocks dropped and oil prices surged Friday after a U.S. airstrike killed a top Iranian general, reigniting geopolitical tensions in the Middle East.

Stocks fell broadly but those losses shrank in afternoon trading. After tumbling more than 350 points following the opening bell, the Dow Jones industrial average ended down 233.92 points, or 0.8%, at 28,634.88. The Standard & Poor’s 500 fell 0.7% to end at 3,234.85. The technology-heavy Nasdaq Composite lost 0.8%, to finish at 9,020.77.

Friday's selloff snapped a five-week winning streak for the S&P 500. U.S. stocks had closed at records Thursday following a stellar 2019 performance, which saw them notch their best year since 2013. 

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Despite Friday's losses, analysts said investors' reaction to the attack was relatively muted. Iran could retaliate against the U.S. by disrupting oil supply in the Middle East, but it would likely be temporary, they said.

"Stocks are resilient right now," said Carter Henderson, portfolio specialist and director of institutional development at Fort Pitt Capital Group. “The U.S. has become more energy independent over the past decade and is less reliant on the Middle East. That's helping to ease investors' nerves."

The Pentagon launched an airstrike late Thursday that killed Gen. Qasem Soleimani, the head of Iran's elite Quds Force. He was an influential figure in Iranian politics, and his death raises fears about possible retaliation against the U.S.

The Defense Department said it conducted the attack as a "defensive action" against Soleimani, who it said was planning further attacks on American diplomats and service members. 

Crude prices surge

Oil prices jumped on concerns that Iran might respond against the U.S.

Brent crude, the global benchmark, climbed $2.35, or 3.5%, to settle at $68.60 per barrel. U.S. crude rose $1.87, or 3.1%, to close at $63.05 per barrel. 

During past flare-ups with the U.S., Iran has threatened the supply of oil that travels from the Persian Gulf to the rest of the world. About 20% of oil traded worldwide goes through the Strait of Hormuz, where the shipping lane is only 2 miles wide and tankers have come under attack this year.

Analysts said investors shouldn't fret about possible oil supply disruptions.

“The U.S. is now the marginal producer of oil in the world, which means it’s not as easy for a supply disruption out of the Middle East to impact global supplies of oil,” says Scott Ladner, chief investment officer at Charlotte, N.C.-based Horizon Investments.

Airline stocks falter

Airlines were among the biggest decliners in the Standard and Poor’s 500 as oil prices rose and raised the prospect of higher fuel costs. American Airlines, United Airlines and Delta shed 5%, 2% and 1.6%, respectively. 

Investor sentiment has climbed in recent weeks because of trade optimism with China, but geopolitical tensions in the Middle East could briefly put a dent in U.S. consumers' pocketbooks, according to Mike Bailey, director of research at FBB Capital Partners. 

"This could be a short-term hit for pricing at the gas pump, which would be painful for consumers," Bailey says. "Travelers may see higher prices for airline tickets, but I expect it to be short-lived." 

Bank shares slide

Financial stocks also dropped. Bond prices rose as investors sought safety, sending yields lower. That hurt banks, which make less money when interest rates are low. The yield on the benchmark 10-year U.S. Treasury note fell to 1.79%, from 1.88% Thursday.

Heightened trade tensions, meanwhile, boosted shares of defense contractors. Northrop Grumman added more than 5% and Lockheed Martin climbed 3.6%.

Shares of exploration companies rose, with Marathon Oil and Occidental Petroleum adding 0.5% and 2.4%, respectively. 

Safe-haven assets rallied, with gold rising $24.70, or 1.6%, to $1,549.20 per ounce.

Carlo Piovano and Alex Veiga of The Associated Press contributed to this report. 

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