Anxious investors looking for relief
Wall Street will be looking for any help it can get this week to stop its summer swoon from becoming something worse.
But it isn’t clear what’s going to make investors feel better any time soon, amid deepening fears over how the housing sector’s woes are spreading in the financial system.
“This has all the makings of a genuine stress test on the resilience of the financial system and policymakers,” said Marc Chandler, a currency strategist at investment firm Brown Bros. Harriman & Co. in New York.
The stock market took another big hit Friday after brokerage Bear Stearns Cos. said the bond market was facing some of the worst upheaval in at least two decades, as spooked investors pull back from extending credit to less-than-top-quality borrowers.
The Dow Jones industrial average slumped 281.42 points, or 2.1%, to 13,181.91 on Friday. It has tumbled nearly 6% in the last 11 trading sessions, after reaching an all-time high of 14,000.41 on July 19.
Many broader market indexes have suffered deeper losses, although the declines still are well in the range of a normal short-term pullback for stocks.
One tonic the ailing market almost assuredly won’t be offered: an interest-rate cut by Federal Reserve policymakers, who meet Tuesday.
As recently as Wednesday some Fed officials were sticking with what seems to be the central bank’s party line -- that surging mortgage delinquencies aren’t a serious threat to the economy as a whole, and therefore there’s no reason to start slashing interest rates.
“We haven’t seen an effect on the broader real economy, but we are looking very, very carefully at that,” said Fed Gov. Randall Kroszner in testimony before the Senate Banking Committee on Wednesday.
Many experts agree that there’s no sign the economy is crumbling, despite the upheaval in housing and on Wall Street.
“Housing is falling hard, but the economy is not,” said Joseph Carson, an economist at money manager AllianceBernstein in New York.
U.S. consumer confidence in July was the highest in six years, according to an index calculated by the Conference Board.
Corporate chief executives’ confidence also jumped last month, according to a regular survey by Chief Executive magazine.
Other data haven’t been so upbeat. U.S. car sales fell sharply in July. And activity in the manufacturing and services sectors of the economy slowed last month, based on indexes tracked by the Institute for Supply Management.
But employment has held up, and that’s a crucial statistic for the Fed.
The government Friday said the economy created a net 92,000 jobs in July.
Although that was below expectations, the main culprit was a drop in government-sector jobs, not private-sector employment, said Scott Anderson, senior economist at Wells Fargo & Co.
The report “was nearly in line with the Fed’s outlook for a modest increase in the unemployment rate and somewhat weaker job growth -- the soft-landing scenario” for the economy, Anderson said. The central bank has wanted an easing of economic activity to damp inflation pressures.
All in all, most analysts say, the Fed couldn’t justify a cut in its key short-term interest rate, which has held steady at 5.25% since June 2006.
Without the balm that a rate cut might provide, investors may have to rely on the tail end of corporate-earnings reporting season for encouraging news this week.
But so far, better-than-expected second-quarter results from many blue-chip companies haven’t been able to overcome the steady drumbeat of bad news from the credit markets, where bank and brokerage losses on high-risk debt are mounting.
In winter and spring, rising delinquencies on so-called sub-prime mortgages began to slam the value of mortgage-backed bonds.
In the last two months investors have become far less willing to buy other dicey debt, such as loans and junk bonds used to finance corporate buyouts.
Wall Street is fearful of a repeat of other periods in recent decades when the credit markets suddenly seized up.
“If markets freeze up for long enough and conditions change fundamentally, if companies can’t borrow, you really end up with a very weak economy and perhaps recession,” said Ethan Harris, an economist at brokerage Lehman Bros. in New York.
Investors have come to expect the Fed to ride to the rescue with lower interest rates in times of severe financial market distress, even if the economy is rolling along.
But policymakers could conclude that the markets’ current troubles are nothing more than an overdue -- and healthy -- adjustment from a period of too-easy credit, many analysts say. Indeed, central bankers last year chastised investors and lenders for, in effect, being too greedy by accepting bond yields too low for the risk involved.
“After repeatedly warning the market that it was mispricing risk, [the Fed] can’t exactly argue against these developments,” Brown Bros.’ Chandler said.
If bond and stock markets continue to spiral lower, however, the issue may become how much pain the Fed is willing to allow investors to endure before policymakers decide that the risk to the financial system is becoming too great.
The stock market might have to sink much further before the Fed gets worried.
The Standard & Poor’s 500 index is down 7.7% from its record high reached July 19, but the drop could extend to 15% and still be within the historical bounds of what’s considered a mere “correction” in a bull market, meaning a short-term pullback before share prices begin rising again.
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The week ahead
Today
* Treasury bill auction.
* Quarterly earnings reports due from Wynn Resorts and Cooper Tire & Rubber.
Tuesday
* Federal Reserve’s Open Market Committee meets to discuss interest rates.
* Labor Department issues preliminary reports on productivity and costs for the second quarter of 2007.
* Federal Reserve reports on consumer credit for June.
* Quarterly earnings reports due from Cisco Systems, Duke Energy, El Paso, Tenet Healthcare and Warner Music Group.
Wednesday
* Quarterly earnings reports due from American International Group, Cablevision Systems, News Corp. and Revlon.
Thursday
* The nation’s largest retailers announce their sales figures for July.
* Labor Department reports on weekly jobless claims.
* Freddie Mac reports on mortgage rates.
* Quarterly earnings reports due from DirecTV Group, Dynegy, Vonage Holdings and Wild Oats Markets.
Friday
* Treasury reports on federal budget for July.
Source: From Times Staff and Wire Reports
