Renewed fears spark sell-off
Wall Street’s mood swung back to the dark side Tuesday, amid rising worries that the housing sector’s woes are spreading and that credit is drying up for corporate takeovers.
The question now facing the stock market: Is the fear level getting high enough to threaten a classic “correction,” meaning a drop of 10% to 15% in key share indexes from their recent peaks?
The sell-off Tuesday moved some market gauges a good chunk of the way toward a 10% pullback. Most broad stock indexes tumbled 2% to 3% in very heavy trading.
The Standard & Poor’s 500 slid 30.53 points, or 2%, to 1,511.04, the biggest one-day drop since March 13. Small-company stocks were hit harder.
The blue-chip Dow Jones industrial average fared better than most market measures, slumping 1.6%, or 226.47 points, to 13,716.95.
Some investors snapped up U.S. Treasury bonds and gold, the usual havens when nervousness rises.
Even as major indexes, including the Dow, have hit record highs in recent weeks, the market overall has been struggling. Stocks have had some wild swings since early June as investors have bounced between optimism and pessimism about the economic outlook -- and particularly about the housing industry’s outlook.
On Tuesday the pessimism boiled over. Dismal second-quarter earnings reports from mortgage giant Countrywide Financial Corp. and chemical titan DuPont Co. fueled new jitters about housing-sector troubles.
What’s more, another surge in interest rates on junk bonds deepened concern about a potential slowdown in the corporate takeover wave that has helped lift stock prices for the last two years.
Bill Strazzullo, a partner at Bell Curve Trading in Freehold, N.J., said the bull market was suffering from “an accumulation of blows,” much like a stumbling fighter in the ring.
“There’s a little more danger, and that’s what the markets are telling you,” said James Glassman, economist at JPMorgan Securities in New York.
But is the danger enough to trigger a sustained bout of selling that would trim at least 10% off major indexes from their all-time highs?
Historically, periodic corrections, or declines, of 10% to 15% have been typical in bull markets before stocks resume their climb. Such sell-offs can help damp speculation and build up investors’ cash, setting up the market for another advance.
But this bull has rolled along without broad-based corrections. The S&P; 500 index hasn’t given up 10% in more than four years. The last serious pullback was a 5.9% drop in the index from late February to early March.
“We are overdue” for a true correction, said Todd Leone, a trader at Cowen & Co. in New York.
The S&P; 500 is off just 2.7% from its record high reached Thursday. Among other indexes, the Russell 2,000 small-stock index, which plummeted 2.8% on Tuesday, is down 5.1% from its record high reached July 13.
Yet many analysts say that big-name stock indexes, such as the S&P; 500, may not be ready to give up 10%. “If we go down 7% or 8% you’re going to see a lot of buying here,” said Joseph Quinlan, market strategist at Bank of America in New York.
He believes that investors aren’t ready to give up hope on the economy. “I think we’re reaching the climax in angst and stress,” Quinlan said.
The corporate earnings picture overall remains reasonably healthy, despite disappointing reports from companies affected by the housing slump, many market bulls say.
Optimism about earnings should keep stocks from melting down, they say.
“I think the glass is still seven-eighths full,” said Brian Stine, investment strategist at Allegiant Asset Management in Cleveland. Strength in foreign economies is helping to prop up many U.S. companies’ earnings, offsetting weakness on the domestic front, he said.
“The headline still is ‘global growth,’ ” he said.
Even as second-quarter results from Countrywide and DuPont slammed the market Tuesday, shares of defense contractor Lockheed Martin jumped $3.57 to $103.09 on its profit report.
Battery maker Energizer Holdings shot up $3.63 to $110.21 after saying quarterly profit rose 22%.
After regular trading ended, online retailer Amazon.com said its quarterly results more than tripled. The company’s shares soared 21% to $84.09 in after-hours trading, after falling $2.49 to $69.25 in regular trading.
As for the threat posed to the takeover boom by rising junk bond yields, analysts noted that not all deals require junk financing. Takeovers of one company by another for stock wouldn’t be affected by bond yields.
Still, any slowdown in buyouts would erode a key pillar supporting the bull market. That could make it harder for stocks to resume their climb soon, even if prices don’t fall dramatically.
The major risk facing the stock market: that housing is foreshadowing a much deeper slowdown in the economy than most investors expect -- and the end of the bull market, not just a short-term pullback.
Recession is the forecast of Lacy Hunt, economist at Hoisington Investment Management in Austin, Texas. He believes that the economy will begin to contract this year or early in 2008, led by a pronounced retrenchment in consumer spending.
His preferred investment: Treasury bonds, on the assumption that a recession would trigger interest rate cuts by the Federal Reserve, pulling Treasury yields down as well and driving up the value of older, higher-yielding bonds.
Among Tuesday’s highlights:
* One measure of the ferocity of the selling Tuesday was that losers swamped winners by almost 9 to 1 on the New York Stock Exchange. On Nasdaq, where the composite index fell 50.72 points, or 1.9%, to 2,639.86, losers had a 5-to-1 edge.
* Countrywide led mortgage lenders’ shares lower after the company said defaults were rising on loans to high-quality borrowers as well as on loans to people with dicey credit. Countrywide plunged $3.56 to $30.50, Downey Financial slumped $2.88 to $55.11 and Fremont General sank $1.70 to $7.65.
Home builders’ shares also continued to slide.
* Brokerage stocks plummeted on fears that growing mortgage defaults would mean more losses on mortgage-backed bonds owned or traded by Wall Street firms. Merrill Lynch slid $2.94 to $77.11, Bear Stearns fell $4.40 to $129.85 and Lehman Bros. gave up $2.51 to $66.34.
* DuPont dived $3.36 to $49.90. Its second-quarter profit fell short of analysts’ expectations, in part because the weak housing sector cut demand for some of its products -- such as chemicals that go into paints.
* Energy stocks took a hit as near-term crude oil futures fell $1.33 to $73.56 a barrel in New York. Exxon Mobil fell $2.60 to $90.84. ConocoPhillips sank $3.30 to $82.33.
* Some investors fled to Treasury securities as a haven, pushing yields down. The 10-year T-note yield dropped to 4.91% -- the lowest since May -- from 4.95% on Monday.
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Junk yields jump and shares slide
A surge in junk bond interest rates in recent weeks has raised the cost of financing takeovers, threatening a key pillar for stocks.
Performance of major stock indexes
*--* Pctg. change Tues. YTD Dow industrials -1.6% +10.1% Nasdaq compos. -1.9 +9.3 S&P; 500 -2.0 +6.5 DJ-Wilshire 5,000 -2.0 +6.9 NYSE composite -2.1 +8.4 S&P; mid-cap -2.3 +10.8 NYSE financials -2.3 -2.3 S&P; small-cap -2.5 +6.7 Russell 2,000 -2.8 +3.1 Dow utilities -3.4 +8.8
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Source: Bloomberg News
