Wall Street sentiment is sinking to fresh lows as the stock market enters the traditionally festive year-end holidays amid growing pessimism about the US economic outlook.
With trading highly volatile, the key question for most investors is whether stocks have touched bottom and are ready to rally, or if a new bear market is around the corner.
The Dow Jones Industrial Average slipped 1.49 percent in the week to Friday to close at 12,980.88. The broad market Standard amp; Poor's 500 dropped 1.24 percent to 1,440.70 and the tech-heavy Nasdaq retreated 1.54 percent to 2,596.60.
Stocks came under heavy selling pressure in the early part of the holiday shortened Thanksgiving week amid growing fears that housing and credit woes would take a bigger bite out of the US economy than anticipated. The market recouped some of the losses in a relief rally Friday but still ended the week in the red.
Comments from US Treasury Secretary Henry Paulson that mortgage delinquencies could keep rising took a toll on sentiment. "There is definitely a chill in the air. You know things are bad when even the US treasury secretary -- a position often regarded as head cheerleader for the economy -- is suddenly sounding quite dour on the outlook for mortgage resets and home foreclosures in 2008," said Douglas Porter at BMO Capital Markets.
"Paulson's downbeat comments helped deepen the already pronounced slide in financial markets, which were in any event all but assuming the crash position prior to Friday's rebound."
With the start of the Thanksgiving holiday that traditionally marks the best season for Wall Street, stocks took a beating as oil prices surged to new heights, the dollar sank to fresh lows and the outlook darkened for the US economy. But it remains unclear whether the market will see the "Santa Claus" rally that generally lifts prices around the Christmas holidays. "The current economic environment is characterised by a high level of uncertainty," said Scott Brown, economist at the brokerage Raymond James.
"Will the economy enter a recession? When will the housing market recover? Does the dollar pose a risk to the global economic outlook? What should the Fed's response be, in the midst of tighter credit conditions, to the combination of downside risks to economic growth and upside risks to inflation?" "I don't expect stocks to make progress until the extent of economic slowdown becomes apparent," said Jeremy Siegel, a University of Pennsylvania economist and consultant to Rittenhouse Asset Management.
Siegel said economic growth "is decelerating sharply, and elevated oil prices mean the possibility of a crippling jump in gasoline and heating oil prices is always present.
"If gasoline rises to four dollars a gallon within the next few weeks, I think the probability of a recession jumps substantially. However, I believe this scenario is very unlikely unless crude oil prices rise well over 100 dollars a barrel," he added.
Some analysts argue that the market will be able to look past what appears to be an economic soft patch that may be over in 2008. "The mood in the market is extremely bleak and stocks are deeply oversold -- all the popular averages down 10 percent since October," said Al Goldman, chief market strategist at AG Edwards.
"The prevalent opinion is why buy stocks ever again. This is the mood normally seen close to bottoms and not before a big selloff. We believe traders should be doing some selected buying. Yes, blood is flowing on Wall Street -- usually a good time to buy some beaten-down stocks."
Bond prices firmed as investors looked for a safe haven. The yield on the 10-year Treasury bond fell to 4.012 percent from 4.150 percent a week earlier, and that on the 30-year Treasury eased to 4.438 percent from 4.523 percent. Bond prices and yields move in opposite directions.
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