Economic fears revive investor angst
Blue-chip stocks head into the week mired in their longest losing streak since August's credit-induced sell-off.
The weight of major headwinds - oil trading near $90 a barrel, continuing problems in credit markets and a slowing economy - are causing renewed investor angst and heightened volatility in the market.
Friday, the 20th anniversary of the 1987 stock market crash, stocks plunged on fears that U.S. economic conditions were worsening, fanning recession fears.
There is rising concern on Wall Street that corporate earnings will suffer more than expected from a weakening domestic economy, despite strong profit growth from American companies doing brisk business around the globe. That fear was driven home Friday, when heavy equipment maker Caterpillar lowered its full-year profit outlook because of a business slowdown in the U.S. caused by a weak housing market.
Caterpillar's pessimistic outlook follows weak earnings reported earlier last week by major U.S. banks, such as Bank of America and Citigroup. Both banks were hurt by losses related to turbulence in the housing, subprime mortgage and fixed-income markets.
"The Caterpillar news reinforced fears that slower economic growth is coming," says Todd Clark, head of equity trading at Nollenberger Capital Partners. "It is a wake-up call the market can't ignore."
Investors viewed the bad news as a reason to sell. The Dow Jones industrials fell 367 points Friday to 13,522, the worst point decline since a 387-point drop on Aug. 9. The Dow has declined five consecutive sessions, its worst skid since a six-day slump in early August. That summer swoon came when investors first acknowledged that problems in credit markets could pose a risk to the broader economy.
The Dow, which rallied to a record high on Oct. 9, powered by interest-rate cuts engineered by the Federal Reserve, has tumbled 643 points, or 4.5 percent, since its recent peak of 14,164.53 and lost 571 points last week alone.
"The market never got over its nervousness from the summer," says Edward Yardeni, president of Yardeni Research. Investors who thought Fed rate cuts would solve all the market's problems now recognize that the problems haunting the market in August are not over, he says. Investors will now be focusing on the avalanche of profit reports to be released this week to determine if the outlook for the economy is as gloomy as the Caterpillar report suggests, Yardeni says.
Wall Street will also watch how the Fed reacts to recent signs of economic distress when it meets later this month, says Quincy Krosby, chief investment strategist at The Hartford. If the Fed cuts rates again, "It will certainly be a catalyst for the market," she says.
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