Sell-off punctuates down week
Wall Street closed out its worst week in four years Friday as stock prices slumped again amid growing fears that the economy was softening and that a long-anticipated market correction could be taking hold.
Though there was relatively little news to explain Friday’s drop, the selling underscored a sharp turn in investor sentiment, as the optimism that carried stocks to record highs in recent months gave way to doubts and pessimism.
“This is a correction,” said Alan Skrainka, market strategist at brokerage Edward Jones in St. Louis. “The mood on Wall Street changes very quickly and the mood has shifted to pessimism. People are selling and in some cases they aren’t even sure why they’re selling.”
A correction generally is defined as a drop of 10% from the market high. This week, the Dow Jones industrial average fell 4.2% -- its most dismal showing since a one-week loss of 4.4% in March 2003.
Most of the week’s decline came with the Dow’s 416-point dive Tuesday. After stabilizing over the next two days, the Dow skidded 120.24 points, or nearly 1%, to close at 12,114.10 on Friday.
Other barometers fared worse, with the Nasdaq composite index sinking 36.21 points, or 1.5%, to 2,368.00 and the Standard & Poor’s 500 index falling 16 points, or 1.1% to 1,387.17. The Russell 2,000 index of small-company stocks tumbled 2%.
Concerns over the economy have been stoked by slowing corporate profit growth and the travails of the sub-prime mortgage market, which has been hit by rising defaults on home loans held by people with shaky credit.
Another factor dogging the market is the unwinding of the so-called Japanese carry trade.
As Japanese interest rates fell to historical lows in recent years, hedge funds and other large investors borrowed money in Japan and reinvested in higher-yielding securities in the U.S. and elsewhere.
But investors, suddenly risk-averse amid increased market volatility, reversed many of those trades this week.
To repay their Japanese loans, investors are selling dollars and buying yen, thus tugging down the value of the dollar.
The dollar sagged to 116.75 yen on Friday, down from 117.58 on Thursday. It had traded at a high of 121.94 yen on Feb. 12.
Gold futures sank as investors appeared to liquidate positions to pay off now money-losing loans that they had taken out to buy stocks. Gold closed at $641.50 an ounce, down $20.80. Crude oil futures rose 36 cents a barrel, to $61.64.
Though this week’s sell-off was initially sparked by a rout Tuesday in China’s stock market, that played little role in the declines the rest of the week, experts said. Fresh cause for concern came Friday with data showing a slip last month in consumer confidence.
In a sign that the weakness in stocks could persist into next week, stocks slid during the second half of the day and fell the hardest in the final 30 minutes of trading.
Heavy late-day selling indicates that professionals, who have spent the day surveying market conditions, don’t like what they see and are anxious to get out of stocks.
Skrainka and others argue that sharp downturns usually don’t reverse themselves immediately. It would take several weeks of good news, they say, to mollify frazzled traders and send stocks up again.
Bulls, however, said that Friday’s selling was due in part to technical reasons and that the market was due for a rebound next week. Underlying economic conditions remain solid, they say, and stock prices will turn up once the spasm of selling subsides.
“My gut feeling is we’re going to be higher from the get-go on Monday and never look back,” said William Buechler, president of Barclay Partners Asset Management, a money management and hedge fund firm based in La Jolla.
One positive sign for stocks, said John Bollinger, head of Bollinger Capital Management in Manhattan Beach, is that buyers have waded into the market this week.
In severe downturns, selling pressure swamps buying pressure. That has not happened this week, he said. Though the broad averages are down, one indicator that Bollinger follows closely shows that there is buying demand for stocks, he said.
“I keep looking at [the market] and saying, ‘Are we really in the grip of selling that’s going to carry us 5% or 10% lower?’ It doesn’t look that way,” Bollinger said.
Stocks probably will rise at some point next week, Bollinger said, and the strength of the rally will yield important clues about the market’s direction.
An emphatic rise with heavy trading volume over two or three days would point to an incipient recovery.
But “if the rally is short-lived and sloppy and gets peeled away, then there’s more to go on the downside,” Bollinger said.
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Declines in stock markets worldwide
A burst of investor jitters drove stocks sharply lower around the globe this week. Sectors viewed as high risk--such as stocks in developing economies and biotech shares in the U.S. --fell fastest. In response, some investors rushed into Treasury bonds for safety, pushing yields lower.
The week’s percentage declines in selected stock markets around the world
China Shanghai composite: -5.6%
Japan Nikkei-225: -5.3%
Australia S&P-ASX; 200: -4.1%
Russia RTS: -7.2%
India Sensex: -5.5%
South Africa All Shares: -4.6%
Turkey ISE 100: -7.0%
Germany DAX: -5.6%
Britain FTSE: -4.4%
Mexico IPC: -7.7%
U.S. S&P; 500: -4.4%
Brazil Bovespa: -7.9%
Percentage losses in key U.S. stock indexes for the week
Dow utilities: -1.4%
NYSE healthcare: -3.5%
Dow industrials: -4.2%
S&P; mid-size: -5.1%
S&P; small stocks: -5.8%
Nasdaq composite: -5.8%
Dow transports: -7.3%
Nasdaq biotech: -7.8%
XAU gold/silver stocks: -9.2%
Source: Bloomberg News