Credit fears have played havoc with Wall Street stock portfolios and US investors could suffer more bruises from fresh upheavals sweeping world markets in the week ahead, despite an emergency rate cut.
Confidence was in short supply on Wall Street this past week as investors sold off stocks amid more glum housing news which has spoiled investors' appetite for mortgage-backed securities and some financial shares.
The Federal Reserve's surprise action Friday, cutting the interest rate it charges commercial banks and making borrowing cheaper, fuelled hopes the Fed will soon move to trim short term rates.
"We expect more volatility in both the credit and stock market in coming days," warned Frederic Dickson, an equity analyst at the DA Davidson & Co. investment firm. The blue chip Dow Jones Industrial Average stock barometer slumped 1.22 percent to 13,079.08 in the week ended Friday after diving and rocketing over 300 points during the week.
The index has lost over 900 points since closing at a record high just over 14,000 on July 19. The broad-market Standard & Poor's 500 fell a lesser 0.55 percent in the week to Friday to finish at 1,445.94 while the tech-rich Nasdaq composite tumbled 1.57 percent to 2,505.03.
The Dow was badly pummelled in the week, but gained traction on Friday after the Fed slashed its discount-lending rate by half a percentage point to 5.75 percent.
Economists said this increased the odds the Fed will trim its short-term federal funds rate, which has been pegged at 5.25 percent since June 2006, at a meeting set for September 18.
"The Fed has substantially downgraded the priority level assigned to inflation concerns and is opening the door to a cut in the target federal funds rate to support growth," said Nigel Gault, a US economist at Global Insight.
Concerns about the US credit market have roiled world markets. American banks have tightened lending standards in response to rising home foreclosures, especially on risky subprime mortgage loans granted to people with stretched finances.
Analysts said US markets could endure fresh turbulence in the coming week because the depth of the crisis sweeping the multi-trillion dollar mortgage market remains unclear.
Fed chairman Ben Bernanke last month cited forecasts suggesting mortgage losses could leave the economy with a 100-billion-dollar bill. The turmoil gripping Wall Street has even prompted some investors to start whispering of a potential recession, but most economists say the world's biggest economy is on a healthy footing even if the housing market's foundations are shaky.
Wall Street could suffer more losses if another large mortgage lender admits trouble. Countrywide Financial, America's biggest mortgage lender, was forced Thursday to use an 11.5 billion dollar credit line, revealing a worsening liquidity picture. The revelation pitched stocks lower on Thursday.
Investors will likely focus more on the markets and corporate headlines in coming days as the flow of economic news eases. There are only a handful of economic releases due in the coming week and the most critical is likely to be a report due Friday on new home sales.
Most economists predict July new home sales slowed to an annualised 830,000 properties after sales dived 6.6 percent to 834,000 homes the prior month. Sales of new homes, which make up a smaller share of the market than existing homes, have plunged over 22 percent in the past year.
"The volatility is not over," cautioned Marc Pado, an analyst at Cantor Fitzgerald, adding, "the market is probably going to struggle for another week or two."
Bond prices jumped in the week to Friday as investors divested stocks. The yield on the 10-year US Treasury bond dived to 4.673 percent from 4.776 percent a week earlier. The 30-year bond yield tumbled to 4.500 percent from 5.005 percent. Yields and prices move in opposite directions.