The Markets This Week
SINCE LATE NOVEMBER, STOCK BUYERS HAVE KEPT their eyes peeled for any fresh threat that might spook the jittery market. It turns out they've been looking at the wrong place.
What's been haunting the stock market early this new year isn't some as-yet-unconsidered risk, but the return of a familiar fear: the unknowable rot at the core of the financial system, which has worsened even as the government has thrown billions at banks to try to fix the problem.
As investors grappled with not-unexpected signs of a deepening economic recession, what really rattled them was the news from banks: Blaming losses at its newly acquired Merrill Lynch unit, Bank of America (ticker: BAC) has been pressing the Treasury for a fresh $20 billion injection, which would hike the government's stake to $45 billion. Citigroup (C) reported an $8.3 billion loss, and will dismantle its empire. Even the profitable JPMorgan Chase (JPM) has had to increase reserves for bad loans, to $24 billion.
Financial stocks led the broad market lower, and they threaten to undo the rally stocks had enjoyed since their Nov. 20 low. An encouraging divergence did emerge by Friday, when other stocks managed to shake off the financial slide to climb higher. Their bounce lacked conviction — but that might owe more to traders' reluctance to be caught short heading to the inauguration's group hug.
The Dow Jones Industrial Average, having dipped briefly below 8000 Thursday, ended the week at 8281, down 318 points, or 3.7%, on the week. The Standard & Poor's 500 surrendered 40 points, or 4.5%, to end at 850; it's 13% above its late-November low, but 46% off its 2007 peak. The Nasdaq Composite Index fell 42 points, or 2.7%, to end at 1529, while the Russell 2000 index of small stocks fell 15 points, or 3.1%, to a 466 close Friday.
Even bullish traders expect stocks to retest their November lows before working their way higher, and this may turn into a self-fulfilling prophecy: Uncommitted investors may become reluctant to wade in now — and index slippage will prompt more selling that can take the S&P 500 toward, or below, its November low near 752. The question: At what level will a sustained rally be born? Was the bounce off the Nov. 20 low a mere bear-market rally or the start of a bull market? Credit Suisse's London-based equity strategists think there's "a 55% chance that November did see the lows," but they don't see a normal bull market emerging "until the structural issues of deleveraging are more complete." For instance, investors have pared back leverage, and central banks around the world are fighting deflation tooth and nail. But some conditions for a conventional bull market have yet to be met, like deleveraged consumer balance sheets and clear signs the credit markets have thawed enough to allow deal-making.
Meanwhile, vexing bank stocks are becoming a smaller part of the market, and the weight of financial stocks in the S&P 500 recently fell below its long-term average of 12.8%, from 22.3% in 2006.
One Wall Street economist thinks it's too soon to buy bank stocks. Deflating home prices, frozen credit markets and the negative-feedback loop from the real economy are three fundamental causes for bank-sector losses — and of the three, only the credit market has seen slight improvement recently. Also, "partial nationalization of the banks creates a host of uncertainties and hazards for investors," he notes, and "excess capacity in the financial sector will have to be removed before the remaining firms can re-establish sustained earnings growth." (Source: Barrons On-Line).
What's been haunting the stock market early this new year isn't some as-yet-unconsidered risk, but the return of a familiar fear: the unknowable rot at the core of the financial system, which has worsened even as the government has thrown billions at banks to try to fix the problem.
As investors grappled with not-unexpected signs of a deepening economic recession, what really rattled them was the news from banks: Blaming losses at its newly acquired Merrill Lynch unit, Bank of America (ticker: BAC) has been pressing the Treasury for a fresh $20 billion injection, which would hike the government's stake to $45 billion. Citigroup (C) reported an $8.3 billion loss, and will dismantle its empire. Even the profitable JPMorgan Chase (JPM) has had to increase reserves for bad loans, to $24 billion.
Financial stocks led the broad market lower, and they threaten to undo the rally stocks had enjoyed since their Nov. 20 low. An encouraging divergence did emerge by Friday, when other stocks managed to shake off the financial slide to climb higher. Their bounce lacked conviction — but that might owe more to traders' reluctance to be caught short heading to the inauguration's group hug.
The Dow Jones Industrial Average, having dipped briefly below 8000 Thursday, ended the week at 8281, down 318 points, or 3.7%, on the week. The Standard & Poor's 500 surrendered 40 points, or 4.5%, to end at 850; it's 13% above its late-November low, but 46% off its 2007 peak. The Nasdaq Composite Index fell 42 points, or 2.7%, to end at 1529, while the Russell 2000 index of small stocks fell 15 points, or 3.1%, to a 466 close Friday.
Even bullish traders expect stocks to retest their November lows before working their way higher, and this may turn into a self-fulfilling prophecy: Uncommitted investors may become reluctant to wade in now — and index slippage will prompt more selling that can take the S&P 500 toward, or below, its November low near 752. The question: At what level will a sustained rally be born? Was the bounce off the Nov. 20 low a mere bear-market rally or the start of a bull market? Credit Suisse's London-based equity strategists think there's "a 55% chance that November did see the lows," but they don't see a normal bull market emerging "until the structural issues of deleveraging are more complete." For instance, investors have pared back leverage, and central banks around the world are fighting deflation tooth and nail. But some conditions for a conventional bull market have yet to be met, like deleveraged consumer balance sheets and clear signs the credit markets have thawed enough to allow deal-making.
Meanwhile, vexing bank stocks are becoming a smaller part of the market, and the weight of financial stocks in the S&P 500 recently fell below its long-term average of 12.8%, from 22.3% in 2006.
One Wall Street economist thinks it's too soon to buy bank stocks. Deflating home prices, frozen credit markets and the negative-feedback loop from the real economy are three fundamental causes for bank-sector losses — and of the three, only the credit market has seen slight improvement recently. Also, "partial nationalization of the banks creates a host of uncertainties and hazards for investors," he notes, and "excess capacity in the financial sector will have to be removed before the remaining firms can re-establish sustained earnings growth." (Source: Barrons On-Line).
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