Stocks Brighten, But What About The Credit Crisis?
NEW YORK (MarketWatch) -- Investors are putting behind them one of Wall Street's most tumultuous weeks in the hope that government plans to take the bad assets of ailing financial firms off of their balance sheets will help stem the year-long credit crisis.
"It was the booster shot that the market was looking for," Owen Fitzpatrick, head of the U.S. equity group at Deutsche Bank, said of the government's measures. "Next week, people will want to get more details on how this whole thing is working then we'll start looking at economic numbers again."
As markets went into freefall over the past week, members of Congress, along with the U.S. Treasury, the Federal Reserve, and the Securities and Exchange Commission, hammered out plans to enact an emergency rescue package for a financial system that had reached full-crisis mode.
On Friday, the Dow Jones Industrial Average jumped 368.75 points to end at 11,388.44. The market had already rallied Thursday in anticipation of the move and of measures aimed at protecting the stocks of 799 financial firms.
Over those two sessions alone, the Dow rallied 778 points, or 7.3%, marking its biggest two-day point gain in eight years.
A long-awaited plan
The government's plan includes efforts to relieve financial firms of assets linked to bad home loans, which have been at the center of the credit crisis that flared up in August of 2007 and led to the collapse of investment firm Bear Stearns in March and of Lehman Brothers on Monday.
"This was what we needed to happen, to remove those assets dwindling on balance sheets," Fitzpatrick said.
"We have a much better picture today onto how we're going to work our way out of this," he said. "Taking out the big names on Wall Street was not working as we had also started taking out some high-quality names along with it and we were seeing a spill-over into other asset classes."
The inability to price those bad assets nearly brought lending between banks to a halt over the past week, forcing central banks around the world to take extraordinary actions, including large injections of liquidity into the system.
The S&P 500 Index gained 48.56 points to finish at 1,255.07. The Nasdaq Composite Index jumped 74.80 points to end at 2,273.9, giving it a 0.6% gain for the week.
But the nearly flat finish for stocks doesn't tell the whole tale. As Lehman Brothers sought bankruptcy protection, the Dow industrials tumbled 504 points on Monday, its worst point drop since Sept. 17, 2001.
As investors fled to safety, government bonds surged, and yields on two-year notes also surged the most since 2001 Monday, before jumping by the most in more than 20 years Friday.
Gold jumped more than $70 an ounce on the New York Mercantile Exchange Wednesday, its biggest one-day jump in dollar terms since at least 1980. In electronic trading Friday, the precious metal then tumbled by more than $68, its biggest drop in 28 years.
The volatility index, , otherwise known as the market's fear gauge, spiked to its highest level in six years Wednesday. On the New York Stock Exchange, trading volumes for all shares traded by the NYSE Group spiked to 4.2 billion on Thursday, the highest on record.
"What we can say is that volatility is extremely high by historical standards," said Ken Tower, senior vice president at Quantitative Analysis Services.
"What we need to see is volatility to come down, as it reflects market uncertainty," he said. "Let's see more about the government's plan and what the market makes of it on Monday."
Once the dust settles
"We've now weathered this recent storm," Tower said. "If somebody wants to talk to me about a two or three months rally, then OK. But it's not the end of this overall downturn, with the economy still going down the drain."
On Wednesday, Fed Chairman Ben Bernanke will present the central bank's economic outlook tothe Joint Economic Committee in Congress.
Ahead of this on Wednesday, investors will get another glimpse of the state of the housing market, with data on the sales of previously-owned homes in August. New home sales data will come out Thursday.
Also on Thursday, data on orders of big-ticket items, or durable goods, will be released, along with the weekly jobless claims tally. On Friday, the final estimate of second-quarter growth will come out.
Once investors digest the government's actions, "we'll get back to an economy that's slowing and the market has to get back to dealing with that," said Deutsche Bank's Fitzpatrick.
Quarterly earnings from homebuilder Lennar are due on Tuesday, while those of KB Home are due Friday. Among other earnings next week will also be those from retailer Bed Bath & Beyond Wednesday.
By Nick Godt