Persistent Fear Drives Stocks Down

Persistent Fear Drives Stocks Down By EDMUND L. ANDREWS and JEREMY W. PETERS
Published: August 29, 2007

The stock market plunged late in the afternoon yesterday, registering its biggest drop in three weeks as investors were hit by fresh worries over declining consumer confidence, falling house prices, shrinking profits on Wall Street and uncertainty about the Federal Reserve.Skip to next paragraph

The New York Times




Related

Minutes of the Federal Committee Meeting on Aug. 7, 2007
Conference Board's Report on Consumer Confidence


Stocks were down most of the day, but the biggest drop came in the last half-hour of trading as computerized trading programs, which automatically sell when stocks fall by predetermined percentages, amplified the gloomy mood that had prevailed from the start. The Dow Jones industrial average closed down 280.28, or 2.1 percent, at 13,041.85. It was the steepest one-day decline in the Dow since Aug. 9, when it shed 387.18 points.
The Standard & Poor’s 500-stock index and the Nasdaq composite were each down 2.4 percent, with all but 13 of the stocks in the S.& P. 500 down for the day.
Analysts said there appeared to be no specific catalyst for the decline. Rather, investors received a steady drumbeat of discouraging news about the intertwined woes of the housing industry, the mortgage market, hedge funds and a broader credit crunch that the Federal Reserve might have difficulty alleviating in the short run without creating longer-term problems for the economy.
“Concern about the credit issue is dominant across all the markets,” said John Shinn, a senior economist at Lehman Brothers. “Everything is dominated by concerns about the unknown.”
Two separate reports released yesterday showed that consumer confidence fell this month and that home prices nationwide continued their slide in June.
Later in the day, minutes from the Federal Reserve’s policy meeting on Aug. 7 showed that policy makers were keenly aware of escalating distress in financial markets and discussed the possibility of taking action 10 days before the Fed reduced the interest rate at which banks can borrow from its discount window.
But the Fed minutes also highlighted the central bank’s reluctance to simply soothe investors in the stock market, and offered no additional clues about the likelihood of a broader, more important cut in the Fed’s benchmark federal funds rate in the near future.
The Conference Board, in its monthly survey of 5,000 households, said its consumer-confidence index dropped sharply in August after surging in July to a six-year high.
Separately, a closely watched measure of home prices provided additional evidence that residential real estate could be poised for a substantial nationwide price decline for the first time in at least 50 years.
The S.& P./Case-Shiller index, which measures prices in 20 major metropolitan areas, declined 0.4 percent in June. That was its steepest monthly drop in five years and left the index 3.5 percent below its level a year earlier.
In all, 15 of the cities surveyed experienced a drop. Detroit experienced the steepest slide, with property values falling 11 percent from a year earlier. In San Diego they fell 7.3 percent, and in Phoenix 6.6 percent.
A significant nationwide drop in housing prices would aggravate the turmoil among mortgage lenders and firms that own mortgage-backed securities. Delinquency and foreclosure rates have already climbed sharply, particularly in subprime mortgages for home buyers with weak credit, but worries have widened to the so-called Alt-A mortgages made to people who have good credit ratings but have overstretched their borrowing.
Yesterday, Merrill Lynch cut its ratings on the shares of three Wall Street powerhouses, Lehman Brothers, Citigroup and Bear Stearns, to neutral from buy on concerns about their exposure to bad subprime loans. Their stock prices all fell: Lehman was down 6 percent, Citigroup 3.5 percent and Bear Stearns 3.4 percent.
The entire financial sector — which until recently was one of Wall Street’s strongest performers — has been particularly hard hit since credit markets started tightening sharply last month.
“It’s a difficult situation for financial firms right now,” said William E. Rhodes, chief investment strategist of Rhodes Analytics, a market research firm. “Financial firms prosper when there’s a lot of liquidity because they can conduct transactions. But right now there’s not very much liquidity.”
Investors had been fixated on the release of minutes from the Fed’s policy meeting on Aug. 7, which was 10 days before the central bank abruptly reversed its hands-off stance toward the markets and reduced its discount rate on temporary loans to banks.

The meeting notes show that Fed officials contemplated the possibility of cutting rates in the future if the credit markets continued to deteriorate. But although Fed economists had just shaved their forecast for growth this year, partly because of slowing growth in productivity, policy makers remained more worried about the risk of higher inflation.Skip to next paragraph
Related

Minutes of the Federal Committee Meeting on Aug. 7, 2007
Conference Board's Report on Consumer Confidence



The minutes suggest that Fed officials paid close attention to the storm signals that had been building in financial markets for several weeks.
Policy makers noted that the markets for subprime mortgages had largely dried up, as investors became much more uncertain about the ability of borrowers to repay. Fed officials fretted that the downturn in housing “could well prove to be both deeper and more prolonged than had seemed likely.”
But the participants in the Fed meeting also took comfort that people with good credit were having little trouble getting conventional mortgages, noting that interest rates on 30-year fixed mortgages had declined slightly. And they remained confident at that time that increases in wages and salaries would continue to support consumer spending. Business investment looked to be on an upward track.
“Recent financial market developments were thought unlikely to have an appreciable adverse effect on capital spending,” Fed officials concluded.
The central bank began changing its position just a few days later. First, it joined other central banks around the world by intervening in financial markets to prevent their benchmark interest rates on overnight lending from climbing above their official targets.
But the big move came on Aug. 17, when the central bank expanded the collateral it would accept from commercial banks and reduced the interest rate on borrowing from its discount window, a source of financing for banks that is usually reserved for temporary emergency purposes.
Fed policy makers are next scheduled to meet on Sept. 18, but it is unclear whether markets will remain calm enough in the meantime to allow them to delay any big decisions until that date.