Dow Keeps Tumbling Despite Good News

Wall Street heard good news about the economy yesterday but didn't pay it much heed: The Dow Jones industrial average shed an additional 200 points to finish its worst week in more than four years, potentially creating a snowball effect that could continue next week.

Worries about the corporate and mortgage lending markets overpowered yesterday's strong growth report and solid economic fundamentals. The Dow, made up of 30 blue-chip stocks, lost 208.10 points yesterday, or 1.5 percent. The Dow fell 4.2 percent for the week, closing at 13,265.47. The tech-heavy Nasdaq composite index lost 37.1 points, or 1.4 percent, to end at 2562.24. That was a 4.7 percent drop for the week. And the broader Standard & Poor's 500-stock index lost 23.71 points yesterday to close at 1458.95, down 4.9 percent for the week

At times yesterday, Wall Street tried to recover from Thursday's big losses, but the markets ultimately nosed over and dived in the last half hour of trading.

It's "horrible, disaster, absolutely the worst-case scenario," said Todd Clark, director of trading at Nollenberger Capital Partners. "I figure we're going to have a pretty nasty day on Monday."

Seemingly ignored in what another trader termed yesterday's "carnage" was the release of the Commerce Department's gross domestic product report. The nation's economic output grew at a healthy 3.4 percent annual rate, or slightly more than expected, from April to June, according to the figures.

Also, favorable feelings about income and employment prospects pushed consumer sentiment to a five-month high, according to an index released yesterday by the University of Michigan and Reuters.

Why the seeming disconnect between Wall Street and Main Street?

"Consumers and retail investors look at [market drop] in the paper and say, 'Geez -- I need to sell off,' " Thomson Financial's Jeoff Hall said. He said the markets' dive over the past two days "has very little or nothing to do with the data" that show a growing economy.

The turmoil in U.S. markets rippled around the globe, particularly affecting Asia.

In South Korea, the Kospi index was down more than 4 percent after the worst trading day in years. The Singapore Straits Times index fell 2.4 percent, while the Nikkei stock average in Japan and the Hang Seng index in Hong Kong shed more than 2 percent each. The Shanghai stock index in China was flat.

Wall Street is fixated on problems in the credit markets, analysts said, including the crash of the subprime mortgage market stemming from widespread housing foreclosures and tightened corporate credit that is holding up planned deals. Analysts call the process now underway a repricing of credit, with investors demanding a higher return on loans and bonds perceived as risky.

England's Cadbury Schweppes said yesterday it would hold off on the sale of its U.S. division that makes Snapple because the company was afraid potential buyers may not be able to get financing for the deal at attractive terms.

"The credit markets are driving everything now, from stocks to Treasuries, even to currency," Mark Kiesel, executive vice president at Pimco Bonds, wrote in an e-mail yesterday. "The stock market will not stabilize until the credit market stabilizes."

Inflation measures in yesterday's Commerce report were mixed. The core consumer price index, which excludes food and energy, rose at an annual rate of 1.4 percent, down from 2.4 percent during the first quarter. But a broader inflation measure that includes food and fuel rose at a 4.3 percent annual rate, up from 3.5 percent in the January-to-March period.

The economic data are "positive and inflation is positive to some extent, but I think the market is getting more and more rattled" by problems in the credit markets, said David Dreman of Dreman Value Management. "I think people are really worried that how this is going to turn out. We don't know how bad it's going to be."
Source :http://www.washingtonpost.com