Wall Street is struggling with renewed fears about the economic outlook and at the same time feeling a chill from a tougher stand from the White House on banks and financial market regulation. The market was hammered over the past week by worries about the US outlook and trouble in China, where an overheating economy may prompt a credit squeeze that hurts the rest of the global economy.
Also hurting the mood was a tough proposal from President Barack Obama to curb the size and scope of banks, and growing opposition to Federal Reserve chairman Ben Bernanke's renomination. In the coming week, markets will deal with the outcome of a Federal Reserve policy meeting, as well as the drama surrounding the Bernanke confirmation. A slew of earnings reports are also expected.
On the economic front, data is expected to show a strong gain in US economic activity in the fourth quarter, but analysts say the figures will likely be skewed by a bounce in inventory activity. Over the holiday-shortened week, the Dow Jones Industrial Average tumbled 4.12 percent to 10,172.98, in a sharp pullback from 15-month highs.
The tech-rich Nasdaq composite sank 3.61 percent to 2,205.29 the broad Standard & Poor's 500 index slumped 3.90 percent to 1,091.76. The recent volatility "is a reflection of how much uncertainty that continues to swirl with respect to the economic landscape and the shape that financial market regulation will take," said Diana Petramala, economist at TD Bank Financial Group. Petramala said the markets were roiled by the proposals by Obama to cap the size and scope of bank activity, a plan unveiled after the White House called for a new tax on big financial institutions.
"There is still a question mark around what the future holds for the US banking sector," she said. "Adding to investor angst this week was the notion that a global recovery could be slower than expected," especially with China appearing to be moving to cool activity, she added. Petramala said data Thursday on US gross domestic product could show a strong growth rate in the economy of 5.0 percent, but cautioned that "over half of the bounce in economic activity looks to have been due to a large inventory swing, and not to sustainable economic drivers."
Despite the renewed skittishness, some analysts said Wall Street is seeing an overdue correction, which could take some of the speculative froth out of the market and set the stage for more gains. "The market seems to want to take a breather, so it found negative spin this week," said Linda Duessel at Federated Investors.
"At a moment when most everyone is looking for a correction, there probably shouldn't be a serious one." Bob Dickey at RBC Wealth Management said traders have been using the current corporate earnings season to lock in profits, after having pushed up the market in anticipation of positive profit reports.
"The market continues to trade in its backward fashion of pulling back on the good news of so many companies beating their fourth quarter earnings expectations," Dickey said. This phenomenon "can help to explain why the market has rallied so strongly over the past nine months and is now giving some back in the face of apparent good news," Dickey added.
"We are confident that this is a dip within an ongoing bull trend, and it will be sharp but short, as is often the case. We expect a trading low sometime in the next few weeks, followed by a renewed uptrend into the summer months." The coming week is likely to be packed with potentially market-moving events.
Monday will see data on US existing home sales, followed by reports Tuesday on consumer confidence and new home sales Wednesday. Earnings are due from key firms Apple, Yahoo, Boeing, Caterpillar and others. The Fed concludes a two-day meeting widely expected to leave its stimulative policies unchanged, but that could be overshadowed by questions on the confirmation of Bernanke.
Analysts said tossing out Bernanke could trigger new turmoil in financial markets. "The bulk of the investment community feels he has done a good job as chairman and the impact on credit markets would be adverse," said Cary Leahey, senior economist at the research firm Decision Economics.
Bonds found favour amidst the stock turmoil. The yield on the 10-year Treasury bond dropped to 3.598 percent from 3.676 percent from 3.808 percent a week earlier and that on the 30-year bond dropped to 4.510 percent from 4.575 percent. Bond yields and prices move in opposite directions.
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