Weekly Wrap
Last Update: 10-Aug-07 16:56 ET
The major averages endured another volatile week of trading amid growing concerns about the economy and stability in the credit markets. Despite a drubbing on Thursday that saw each of the major indices drop at least 2.0%, they all still closed higher for the week.
Stocks have traded erratically in recent weeks, with the Dow Jones Industrial Average consistently showing triple-digit swings. The volatile trading follows a period last month when both the Dow and S&P 500 saw record finishes. The Dow is off nearly 6% from its record close.
The markets rallied early in the week ahead of the Federal Reserve's policy meeting. Despite mounting concerns that the problems in the sub-prime mortgage market will hurt economic growth, the Fed on Tuesday said inflation remains its predominant concern – not the challenging lending environment. Accordingly, the central bank kept the fed funds rate at 5.25%.
The Fed's decision to keep its benchmark rate stable was widely expected, but investors were looking for more soothing comments about the current credit problems and ongoing weakness in the housing market, which have weighed heavily on sentiment in recent weeks.
Sentiment took a big hit on Thursday after French bank
BNP Paribas said it had frozen three funds that invested in sup-prime mortgages because it was unable to properly value their assets.
The announcement by BNP Paribas exacerbated worries about the impact of the current credit market troubles, dragging down finanical stocks and the overall market.
A move by the European Central Bank to boost cash reserves to money markets further roiled the markets on Thursday. Alhtough the ECB's loan of more than $130 billion in overnight funds to banks was intended to boost liquidity, nervous investors saw the move as further evidence of the severe problems impacting the credit markets. The Federal Reserve also added approximately $24 billion in reserves to the US banking system to help calm investors, but worries about tight credit conditions and systemic risk continued to weigh on sentiment.
Those worries were compounded early Friday following bleak outlooks from
Coutrywide Financial (CFC), the nation's largest mortgage lender, and
Washington Mutual (WM), that suggested the fallout in the sub-prime lending market is making its way to prime borrowers. Both companies noted weakness in the secondary market and that the funding liquidity situation is diminishing, creating uncertain conditions.
Investors, meanwhile, were again unsettled by the realization that central banks around the globe acted in a seemingly coordinated effort to inject more cash than usual into their banking systems. The ECB again led that move on Friday, adding another $83 billion, while the Federal Reserve followed suit with a $38 billion infusion that was carried out in a three-part act.
The major indices were down sharply in early trading on Friday, but ultimately recovered to end the day mixed in a seeming appreciation of the Fed's effort to ensure a smooth flow of credit.
Separately, a host of retailers released their same store sales figures for July this week and they were disappointing overall due to a more challenging spending environment.
On the corporate front, a number of companies posted solid earnings results, including technology bellwether and Briefing.com Active Portfolio holding
Cisco Systems (CSCO). The networker's good news gave the tech sector and the broadr market a nice lift on Wednesday.
Broader concerns about the economy and the current lending environment will continue to dictate the market's direction. With the credit market situation still uncertain, volatile trading conditions are likely to persist.
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Richard Jahnke, Briefing.com
