As it approaches the year's halfway point, Wall Street is mired in worries about a sputtering US economy and surging energy costs as the market braces for second-quarter corporate results.
Investor sentiment continues to deteriorate amid bleak news on housing, banking and the auto sector.
Although gloom has thickened, some “contrarian” analysts say the negative mood is the kind of environment that could mean a snapback is on the way.
The Dow Jones Industrial Average sank 4.2 percent in the past week to end at 11,346.51 as the blue-chips neared a so-called bear market representing a loss of 20 percent from last year’s high.
The Standard & Poor’s 500 broad-market slumped 3 percent to 1,278.38 and the tech-heavy NASDAQ composite fell 3.8 percent on the week to 2,315.63.
The relentless pounding of the stock market saw no letup in the past week.
The dollar skidded and oil prices burst above US$142 per barrel for the first time, after the US Federal Reserve warned of rising inflation in a weak economy but gave no hint of action on interest rates.
“The Fed’s latest policy directive did a good job of tap dancing; that is, of pointing out risks on all sides without promising any action,” said Ethan Harris, economist at Lehman Brothers.
“Clearly the Fed is trying to buy some time in the face of major conflicting signals,” he said.
Others said that the lack of clarity along with risks of recession and inflation had put investors on the defensive.
“With oil prices bursting through the US$140 threshold and seemingly unstoppable, economists are busily debating whether it’s all going to end in fire [inflation] or ice [deep recession],” Douglas Porter at BMO Capital Markets said.
“Equity markets aren’t so concerned about the fineries of the debate, but are instead much more focused on the ‘it’s all going to end’ portion of the discussion,” Porter said.
Kevin Giddis, analyst at Morgan Keegan, said the market and the economy appear to be in a downward spiral with no relief in sight.
“As the economy weakens, the dollar falls. As the dollar falls, the price of crude oil, supplemented by strong global demand, makes a new record every day,” he said.
“This is a nasty trend that is likely to be with us for the balance of 2008. This will keep the pressure high on the Fed to do something. The bigger problem is they are limited in the response. But, if you can affect the dollar, you can affect the price of oil and the overall economy,” Giddis said. “Short of that we are probably going to wallow around in the mud until we reach the bottom of a crisis that has shaken this country to the core.”
The panic on the stock market helped bonds, which investors often flock to during volatile times. The yield on the 10-year Treasury bond fell to 3.990 percent from 4.137 percent a week earlier and that on the 30-year bond eased to 4.537 percent from 4.702 percent. Bond yields and prices move in opposite directions.
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