The Markets This Week
A MARKET INCREASINGLY TRADING ON ITS FEARS, quite ironically, helps turn those fears quickly into reality.
Last week, that fear was of bank nationalization, and it sent the Dow Jones Industrial Average to its worst slump in more than six years. The cycle was vicious: Worries that government intervention will wipe out the equity of existing shareholders led investors to sell bank stocks hand over fist, and plummeting stocks only add to pressure on the government to take drastic action.
Bank officials talked up their capital bases, but the cost of guaranteeing them against defaults rose. Government officials have been careful not to stoke nationalization fears but have yet to douse them convincingly. Federal Reserve chairman Ben Bernanke, for instance, had argued that it is challenging for the government to manage banks over long periods of time.
Yet the pressure on the government to act mounts as Bank of America (ticker: BAC) shares slipped 73% in less than two months to 24-year low near 3.79. Citigroup (C) fell for six straight days and lost nearly half its value, closing below 2, its lowest since 1991.
The frenzied cycle — egged on when the Senate Banking committee chairman said some banks may have to be nationalized for a short time — was momentarily broken when administration officials indicated that the government would prefer big banks to stay private. That allowed stocks to claw back from intraday lows Friday afternoon, but how long this reprieve lasts will depend almost entirely on what the government and banks do next.
The Dow ended the week down 485 points, or 6.2%, to 7366, its lowest close since October 2002.
The blame can't all be pinned on financials, since BofA, Citi, American Express (AXP), and JPMorgan Chase (JPM) carry increasingly less weight in the 30-stock benchmark, and General Motors' (GM) continued struggles and Hewlett-Packard's (HPQ) 13% profit decline all contributed to the slippage.
The Standard & Poor's 500 fell for the sixth time in seven weeks. It is barely holding above its Nov. 20 low of 752, and is 51% off its 2007 peak. The Nasdaq Composite Index fell 93, or 6.1%, to 1441, while the Russell 2000 declined 37, or 8.3%, to 411. Gold rose 6.4%, its fourth gain in five weeks, to push within spitting distance of its record peak of $1003 (source: Barrons Online).
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