Market Features
Coming Week: Eye of the Storm?
Nat Worden
03/29/08 - 09:15 AM EDT
The trillion-dollar question for U.S. investors now is whether the skies are finally clearing or this is only the eye of the storm.
After months of high winds, the financial hurricane of the U.S. housing bust made landfall on Wall Street in mid-March and capsized a major U.S. investment bank, Bear Stearns (BSC - Cramer's Take - Stockpickr). Raising the potential of a systemic breakdown in the financial system, the Federal Reserve launched its biggest life raft since the Great Depression, offering to lend hundreds of billions to commercial and investment banks in return for mortgage-backed securities of questionable value.
While regulators and lawmakers come to terms with the Fed's extraordinary encroachment into the market, nervous investors have restored some sense of calm. That said, stocks are still showing weakness despite hopes that they can paddle to high ground, and traders are watching credit spreads with bated breath for signs that the market's appetite for risk will return.
"We're seeing some signs of improvement in the credit markets," says Hugh Johnson, chairman of Johnson Illington Advisors. "I'm just hoping that there isn't some time bomb ticking out there waiting to go off that will start the cycle of fear all over again."
Credit spreads -- the difference between interest rates on bonds and risk-free, short-term securities like treasuries -- have moderated in the wake of the Fed's rescue efforts. That said, they remain wide compared to historical norms, signaling that investors are still largely taking cover and waiting things out.
Last week, the Dow Jones Industrial Average tumbled 1.2%, while the S&P 500 lost 1.1%. For its part, the Nasdaq Composite ended the week up 0.1%.
In addition to the persistence of the credit crunch, the threat of economic recession is weighing on investor confidence. Signs of weakness are building, with real estate prices falling throughout the nation and the gauge of expectations for the future in the Conference Board's consumer confidence index hitting a 35 year-low, harkening back to 1970's stagflation, the Vietnam War and a Mideast oil embargo.
Economists are expecting to see the government report the third straight month of contraction in the U.S. labor market on Friday. On average, they're expecting March data to show a decline in nonfarm payrolls of 40,000 jobs and a rise in the unemployment rate to 5% from 4.8%. Despite widespread concerns about a recession in the markets, this marks the first month that Wall Street's graybeards are actually forecasting a decline in the jobs data, signaling that the market is resigning itself to an economic downturn.
Since Wall Street's financial crisis stems from a lack of confidence in the value of a sea of securities tied to mortgage debt that sits on the balance sheets of the nation's financial institutions, further deterioration in the economy threatens to spread fear to other areas in the market.
"We're in the early stages of this recession, and I feel there's very likely to be problems in other areas of household debt, like credit cards and auto loans, as well as commercial real estate debt and high-yield corporate debt," says Paul Kasriel, chief U.S. economist with Northern Trust Company of Chicago. "That's all on the horizon and that could trigger renewed fear."
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