By Michael J. Martinez
The Associated Press

NEW YORK - If you were to superimpose a chart showing the Dow Jones industrial average for the past few weeks with a chart showing oil prices, you'd see a distressing mirror image - when oil went up, stocks went down.

For the past week, investors wondered what would break stocks out of the cycle. 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. Crude oil futures continued to hover around $44 per barrel and, some analysts said, 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.

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, because companies will likely attempt to pass on increased fuel costs as well.

Consumer spending, of course, is one of the engines of the economy. And that has Wall Street very nervous.

That was reflected in the markets this week. The Dow Jones industrial average plunged 163.48 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 Friday after the weak jobs report, putting its decline for the week at 3.2 percent.

It was 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.

Wall Street had been expecting 235,000 new jobs. 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 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 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 increase Tuesday, Greenspan and his colleagues could help the economy generate more growth, but then oil-induced inflation becomes more of a risk.

But 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.