Downbeat news rattles investors
Stock prices tumbled Friday as anemic U.S. job growth last month -- weakened by the housing slump -- and an unusually negative market assessment from a major Wall Street firm inflamed fears of substantial economic pain.
After a turbulent, up-and-down week, the stock market seemed to decide that it preferred down, in a big way. The Dow Jones industrials sank almost 300 points, more than 2%.
The stage was set for a market tumble by news that U.S. payrolls grew by only 92,000 jobs in July, compared with the 126,000 projected by economists, as the unemployment rate inched up to 4.6%. The troubled construction industry trimmed 16,000 jobs, the Labor Department said. In a separate report, a measure of the nation’s giant service sector showed unexpectedly slow growth.
Stocks fell on the job report but the Dow was off only 11 points when Bear Stearns Cos. began a conference call with investors. During the call, the Wall Street firm’s finance chief, Sam Molinaro, said the current bond-market upheaval, in which investors are fleeing risky securities, was as bad as any he had seen in 22 years.
Share prices promptly began to slide and kept doing so until the session ended.
The Dow Jones industrial average sank 281.42 points, or 2.1%, to 13,181.91.
From its record high July 19, the Dow is down 5.8%. It’s still up 5.8% year to date.
Broader indexes suffered larger losses, with smaller stocks absorbing the biggest hits as investors fled for safer ground.
The Standard & Poor’s 500 index fell 39.14 points, or 2.7%, to 1,433.06. The S&P; is off 7.7% from its peak and is clinging to a 1% gain for the year.
The Russell 2000 index of smaller-company stocks slumped 28.57 points, or 3.6%, to 755.42. The small-cap index is down 12% from its peak, putting it in “correction” territory.
Generally, Wall Street calls a market drop of 10% or more a correction and says a bull market is over when key indexes fall more than 20% from their highs.
“The news is just overwhelmingly difficult for investors to mount much enthusiasm for buying stocks,” said A.C. Moore, chief investment strategist for Dunvegan Associates Inc. in Santa Barbara.
Pessimistic investors fear that a rapidly deepening credit crunch, which in the last two weeks has made it hard for many companies to borrow money, will combine with mounting foreclosures and falling sales of homes and cars to cause a recession. But few if any analysts are actually forecasting such a dire scenario, and economists said not all of the news Friday was bad.
July’s employment data in part reflected a decrease of 15,300 public education jobs, which is to be expected in July. That helped pull government employment down by 28,000 positions while private sector employment rose by 120,000.
Overall job growth has been slowing this year, suggesting that the economy is struggling with the housing bust. Thus far in 2007, employment has increased an average of 136,000 jobs a month, compared with 189,000 in 2006, according to Labor Department figures.
“The job market is bending under the weight of the housing and mortgage downturn,” said Mark Zandi, chief economist with Moody’s Economy.com. “I don’t think it’s going to break, but it’s going to be tested in the coming months,” he said.
Average hourly earnings for production and nonsupervisory workers, who make up 80% of the American workforce, rose six cents, or 0.3%, in July to $17.45. But the rise did people little good because the average workweek shrank slightly, leaving weekly earnings little changed at $589.81.
Although the economy has continued to grow and even picked up speed during the second quarter, analysts are increasingly worried that trouble in the housing and mortgage markets could turn into a full-blown credit crunch in which banks constrict lending, causing growth to slow or stall out.
Americans turned more optimistic about employment last month, according to a report this week by the New York-based Conference Board. But that optimism did not translate into increased consumption; automakers, for one, reported a steep decline in sales. Nor did the optimism result in a pick-up in activity in the nation’s service sector. The Institute for Supply Management’s nonmanufacturing index fell more than expected in July to 55.8 from a 14-month high of 60.7 in June as six of 15 service industries reported a contraction of business. The index, which includes banks and retailers, still shows the service sector as a whole growing.
In some sense, Friday’s job report represents what the Federal Reserve has wanted to see. The central bank, whose policymakers meet Tuesday, has been concerned that a tight labor market is driving up inflation, and has suggested it would not mind seeing the jobless rate climb somewhat. In recent congressional testimony, Fed Chairman Ben S. Bernanke predicted that the rate would climb to between 4.5% and 4.75% by the fourth quarter. The rate reached a five-year low in March of 4.4%.
“We still think the fundamentals are OK,” said Al Goldman, strategist at A.G. Edwards. “It’s a soft landing, not a hard landing.”
The problem, analysts warned, is that as employment growth and the pace of economic activity slow, the economy becomes more vulnerable to shocks such as an outsize credit crunch. “The Fed has worked to slow growth and they’ve got it,” said Zandi. “Now, we’re open to anything else going wrong.”
Wall Street firms’ own stocks, which have been struggling this year, were punished especially hard Friday.
Bear Stearns tumbled early in the day after Standard & Poor’s Corp. lowered to negative its bond-rating outlook for the firm. But the shares rebounded into positive territory before Molinaro’s remarks, then slid again to close down $7.28, or 6.3%, at $108.35.
Lehman Brothers Holdings fell $4.67, or 7.7%, to $55.78. Merrill Lynch fell $2.50, or 3.5%, to $70.05. Morgan Stanley fell $3.26, or 5.1% to $60.62. The New York Stock Exchange financial index fell 3.1%.
Southern California stocks with exposure to the troubled housing market were among the day’s biggest losers.
Impac Mortgage Holdings of Newport Beach skidded 59 cents, or 26%, to $1.66. Santa Monica-based Fremont General fell 89 cents, or 17%, to $4.49. FirstFed Financial dropped $5.63, or 12%, to $40.41.
Retail stocks also were hit hard in a sign of worries that consumer spending could continue to decelerate if jobs are harder to get. J.C. Penney plunged $3.08 to $65.73. Kohl’s slid $3.09 to $57.32.
The sell-off capped another furious week on Wall Street in which investors were barraged by a steady diet of news indicating that problems tied to sub-prime mortgages and junk bonds were worsening.
The Dow ended the week down 0.6%, the S&P; finished off 1.8%, the Nasdaq ended down 2% and the Russell 2,000 closed the week off 2.9%.
Investors huddled Friday in the relative safety of Treasury bonds, with the yield on the benchmark 10-year T-bond easing to 4.69% from 4.77% late Thursday.
Crude oil futures fell $1.38 to $75.48 a barrel in New York after the employment report suggested the economy could slow.
Overseas, key indexes rose 0.4% in Hong Kong and 3.5% in Shanghai. Stocks fell 1.2% in Britain, 1.3% in Germany and 1.5% in France. Shares in Japan edged down.
peter.gosselin@latimes.com
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Hamilton reported from New York and Gosselin reported from Washington.
