Antsy market braces itself before opening bell
NEW YORK -- Contagion. Spillover. Volatility. Call it what you want. The financial fallout from the housing bust is spreading beyond the battered shares of home builders, mortgage lenders and investment banks.
The entire stock market is now being infected by the turmoil in the credit markets caused by home loans gone bad, imploding hedge funds, fast-sinking values of mortgage-related debt and a sharp rise in borrowing costs.
With Wall Street bracing today for more turbulence after another big sell-off Friday, the Standard & Poor's 500 enters the week down 7.7% from its record high on July 19 — its biggest percentage decline since a 10%-plus correction in March 2003. The S&P is up 1% for 2007 and in danger of blowing its once-hefty 9.5% year-to-date gain.
The fear level seems to be rising with each nugget of bad news related to the fallout from the housing woes. Investors looking for reassurance Friday were instead jolted by Bear Stearns Chief Financial Officer Sam Molinaro. He said conditions in the credit market are the worst he has seen in his 22 years on Wall Street and that the firm, which has had two hedge funds implode because of bad bets tied to risky mortgages, was preserving capital to "weather the storm."
"Bear is a big gun in the industry, and (Molinaro's) comments added to the fear level," says Timothy Vick, portfolio manager at Sanibel Captiva Trust. "The market is searching for answers as to who is holding the risk and how big that risk might be."
Investors aren't waiting around for the answer. Stocks of all sizes and styles are being repriced downward. Blue chips in the Dow Jones industrial average are down 5.8% from their high. Small stocks in the Russell 2000 index are off 11.7%. Tech stocks in the Nasdaq composite have given back 7.7%. Even the broadest stock index in the USA, the Dow Jones Wilshire 5000 is 8.1% from its high.
More worrisome: The average stock in an S&P index that tracks 1,500 stocks is 21% below its 52-week high. The S&P 500 has also fallen below its average price over the past 200 days, a bearish signal, says Chris Johnson, strategist at Johnson Research Group.
The severity of the decline has some Wall Street pros looking for a possible bailout from the Federal Reserve, which meets Tuesday. The central bank is widely expected to keep its benchmark interest rate steady at 5.25%, but some think a rate cut is required to relieve pressure in the system. While a cut is a long shot, soothing words from Fed Chairman Ben Bernanke are a must to allay fears.
"The Fed must not only say they're monitoring what is going on, but assure the market that they have liquidity available to overcome the crisis," Johnson says.
Investors must keep the turmoil in perspective (the Dow's still up 5.8% this year), says David Sowerby, portfolio manager at Loomis Sayles. "Over the last 75 years, the market has averaged a 10% correction once a year. Why should 2007 be any different?"