Wall Street sustained a fresh bruising in the past week as renewed concerns over the financial health of major banks and two large mortgage-financing firms shook investor confidence. The main market indexes have entered "bear market" territory with a drop of more than 20 percent from their peaks amid a lingering housing market slump, a credit crunch and rocketing world oil prices.
Fears about the financial stability of Fannie Mae and Freddie Mac, two companies, which help prop up the vast US mortgage market, sparked a heavy sell-off of the companies' shares and dented wider market sentiment. The leading Dow Jones Industrial Average shed 1.7 percent to 11,100.54 in the week to Friday. The tech-rich Nasdaq lost a much slighter 0.3 percent for the week to 2,239.08 while the broad-market Standard & Poor's 500 index shed 1.9 percent to 1,239.49.
"This time, credit concerns came in the heavyweight variety, as investors were spooked by talk that mortgage giants Fannie Mae and Freddie Mac may need a bailout by Washington," Douglas Porter, an economist at BMO Capital Markets, said in a briefing note.
Worries about Fannie and Freddie clouded the market Friday, as Treasury Secretary Henry Paulson said the government wanted to support the two firms "in their current form."
Analysts say Fannie and Freddie help keep the multi-trillion-dollar mortgage market lubricated because of their role in buying up mortgage portfolios from big banks, re-packaging them and selling them as securities to investors.
Concern about their financial health has rippled through Wall Street and global markets because the two firms own or guarantee over five trillion dollars in loans, or about 40 percent of the total value of home loans in the United States.
Analysts said nagging concerns about the banking sector - Wachovia bank warned investors on Wednesday it would likely post a second quarter loss as large as 2.8 billion dollars - also weighed down Wall Street.
Mortgage and credit woes have been plaguing the banking sector for months, despite the efforts of some banks to stem such losses and raise fresh capital from cash-rich foreign investors. Traders continued to keep a close eye on Lehman Brothers, a large investment bank, which has seen its stock pounded in recent weeks as some market-players have questioned its finances.
The news flow is set to accelerate in the coming week, as a flurry of companies report their latest quarterly earnings, but investors say sentiment is unlikely to change any time soon.
"Next week has the potential to be crucial in terms of near-term market direction. In addition to the start of the heavy flow of second quarter earnings reports, there is a relatively heavy calendar of economic releases," said Gregory Drahuschak, a market analyst at Janney Montgomery Scott. A flurry of economic reports, including snapshots on inflation, retail sales and home construction, will be released in the coming week.
June retail sales are forecast to moderate to a rise of 0.3 percent after surging a stronger-than-expected 1.0 percent in May. Economists closely track retail sales for clues on consumer spending, a key driver of economic growth.
Surging oil prices, which have been stoked by geopolitical jitters related to Iran's nuclear program, also weighed down the market in recent days. A New York-traded oil futures contract briefly struck a record high over 147 dollars a barrel on Friday. Bonds got a lift from the stock market's troubles. The yield on the 10-year Treasury bond fell to 3.940 percent from 3.990 percent a week earlier and that on the 30-year bond eased to 4.517 percent from 4.531 percent. Bond yields and prices move in opposite directions.