Credit fears keep bears in charge
After the stock market’s worst week in years, you may be happy to have reached the weekend. But should you be dreading next week?
Share prices sank for a second day Friday as worries persisted that a sharp tightening of high-risk corporate credit would derail stock-boosting buyouts and perhaps even hamper business activity.
The market staged a feeble rally early in the day after the government reported that U.S. economic growth accelerated to a 3.4% annual pace last quarter from 0.6% in the first quarter, even though housing woes appeared to suppress consumer spending for the first time.
Despite the slightly better-than-expected overall report, bearishness quickly took hold of the market and the major equity indexes turned down, falling especially sharply in the final 30 minutes of trading.
A day after it shed more than 311 points, the Dow Jones industrial average closed down 208.10 points, or 1.5%, at 13,265.47. Other major indexes also lost ground, with the Nasdaq composite dropping 37.10 points, or 1.4%, to 2,562.24, and the Standard & Poor’s 500 falling 23.71 points, or 1.6%, to 1,458.95.
The pullback Thursday and Friday wiped out $526.1 billion in shareholder wealth from stocks in the S&P; 500.
The market’s inability to hold its gain amid positive news underscored the pessimistic mind-set that has taken hold on Wall Street.
“This is the revulsion phase of a financial mania” in which investors frantically sell stocks, said Hugh Johnson, chief investment officer at Johnson Illington Advisors in Albany, N.Y.
Indeed, Friday’s slide highlighted a recent disconnect: The market is tanking even as the economy is growing. That partly reflects the fact that the recent economic growth was largely expected and theoretically already taken into account by stock investors.
In addition, the market’s tumble this week stemmed largely from fears that the boom in private equity buyouts, which has helped propel the market rally this year, is at or near its end. But several analysts predict that stocks will bounce back next week as the selling wanes and investors pick through the wreckage.
“You don’t tend to go straight up and then straight down,” said Liz Ann Sonders, chief investment strategist at Charles Schwab Corp. “You don’t tend to go from all-time highs to a new bear market.”
But other market professionals said stocks might not stabilize until the fall.
Even if they rebound somewhat next week, “it doesn’t mean problems have gone away,” said A.C. Moore, chief investment strategist for Dunvegan Associates Inc. in Santa Barbara. “They’ve not gone away.”
For the week, the Dow lost more than 585 points, or 4.2%, the blue-chip average’s biggest point drop in five years and its sharpest percentage decline since March 2003. The S&P; gave up 4.9%, its worst performance in five years. The Nasdaq sank 4.7%, though it had an even worse week in February this year.
Since hitting their record highs six trading days ago, the Dow has lost 5.2% and the S&P; 500 is down 6.1%. The Nasdaq, which reached its peak in March 2000, is off 5.8% during the same short period. The Dow and the Nasdaq are still up more than 6% for the year, while the S&P; is clinging to a 2.9% gain.
The selling Friday came on heavy volume -- a sign of a rush for the exits by investors. Thursday’s New York Stock Exchange volume was the second-largest of all time, and preliminary data indicated that Friday’s would be in the top 10. Declining stocks outnumbered advancers by about 2 to 1 on the NYSE.
Stocks of smaller companies fell especially hard this week, in part because they can’t benefit as much as big companies do by participating in faster-growing foreign economies.
The Russell 2,000 index of small-capitalization stocks sank 13.65 points, or 1.7%, on Friday to 777.83. For the week, the index dropped 7%, its biggest weekly slide since September 2001.
The wave of corporate takeovers is being threatened by a paroxysm in the bond market. Private equity firms and some corporate borrowers have been unable to sell junk bonds to raise funds because investors suddenly deem them riskier than last month and even last week.
That problem has resulted mostly in financing headaches for investment banks and private equity firms. But British food giant Cadbury Schweppes on Friday said it put off an auction of its U.S. beverage operation, citing “extreme volatility” in the debt market. The move marked one of the first times that a sale of a company had been disrupted because of the credit crunch.
That exacerbated fears that the credit pinch could impede economic growth by preventing some companies from borrowing money to expand their businesses.
“It definitely poses a very significant risk because the economy runs on credit, and if credit’s not available the economy can’t run,” Johnson of Johnson Illington Advisors said.
Despite the tumult, buyouts continued to be announced Friday. Medical device maker Medtronic, seeking to expand its spinal product business, said it would buy Kyphon for $3.9 billion. Kyphon soared $12.92, or 24%, to $66.60. Medtronic slipped 11 cents to $50.81.
Also, Deb Shops agreed to be acquired by a private equity firm for $390 million. Deb fell 17 cents to $26.51.
The Treasury bond market lately has been the mirror image of the junk bond market, with investors seeking out the relative safety of government securities, lowering their yields. The 10-year Treasury note’s yield finished Friday at 4.76%, down from 4.79% late Thursday.
The dollar was mixed against other major currencies, while gold prices fell. Oil futures climbed $2.06 to $77.01 a barrel on the New York Mercantile Exchange, a penny shy of its all-time high.
The market decline has taken a stiff toll on Wall Street’s own stocks. The NYSE Financial index is down 5% this year.
Shares of private equity giant Blackstone Group have tumbled 21% since going public a month ago. They sank $1.21, or 4.7%, to $24.49 on Friday.
Some companies that reported earnings Friday saw their shares rise or at least lose little amid the market weakness.
Home builder Standard Pacific posted a second-quarter loss as sales fell and the company lowered the value of its inventory amid the worst U.S. housing slump in 16 years. Shares of the Costa Mesa-based company rose 34 cents to $15.
Clear Channel Communications reported a 19% jump in second-quarter profit, helped by outdoor advertising. The company’s stock rose 20 cents to $36.95. Oil company Chevron reported a 24% jump in second-quarter profit. Its shares fell 58 cents to $86.88.
But shares of Gemstar-TV Guide International slid 10 cents, or 1.7%, to $5.78 after the Hollywood-based publisher of TV Guide magazine said second-quarter earnings surged 42%, led by the company’s interactive program guide business.
Most Asian markets fell Friday in reaction to the U.S. market plunge, but European markets -- which were open during part of the big U.S. drop Thursday -- showed more modest moves. Key stock indexes fell 2.4% in Japan, 2.8% in Hong Kong, 0.6% in Britain, 0.8% in Germany and 0.5% in France.
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Pulling back
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The Standard & Poor’s 500 is down 6% from its high of July 19. A classic “correction” in a bull market would be a drop of between 10% and 20%.
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Performance of major stock indexes, Thursday-Friday and year to date
*--* Pctg. change 2-day YTD Nasdaq compos. --3.2% +6.1% S&P; mid-cap --3.5% +6.8% DJ-Wilshire 5,000 --3.8% +3.2% Dow industrials --3.8% +6.4% NYSE financials --3.9% --5.7% S&P; small-cap --3.9% +2.5% S&P; 500 --3.9% +2.9% NYSE composite --4.3% +4.0% Russell 2,000 --4.3% --1.2% Dow utilities --4.6% +3.9%
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Sources: Bloomberg News, Times research
