The Stock Market Fights Itself
After plummeting more than 525 points over the past five trading days, including a 311-point drop on Thursday, the Dow Jones industrial average doesn't seem to know which way is up.
Bulls and bears spent the better part of Friday morning struggling for control of the markets. After seesawing, the Dow dropped 70 points by late morning, despite a relatively positive Commerce Department report on second-quarter growth in the gross domestic product.
The government reported that the U.S. economy expanded at a solid annual rate of 3.4 percent in the three months ending June 30. This marks a huge turnaround from the paltry 0.6 percent growth the economy experienced in the worrisome first quarter. And it was the best quarter for economic growth since the start of 2006.
Unfortunately, the 3.4 percent preliminary growth estimate fell slightly shy of Wall Street's consensus forecast of 3.6 percent growth. The report also showed that despite overall economic improvement, the pace of consumer spending growth slowed considerably in the second quarter from the start of this year.
Because of the mixed signals, neither bulls nor bears seem able to wrest control of the market. Indeed, traders aren't sure whether to bet against the economy, because of Thursday's troublesome news about the housing market, or bet on the economy because of today's new economic data.
For the bulls, the fact that investors didn't resoundingly buy on Thursday's dip was a disappointment in and of itself.
Consider the carnage the equity markets have seen lately. On Thursday alone, all 10 sectors of the Standard & Poor's 500 index of blue-chip stocks lost ground, with losses ranging from 1.3 percent for the technology sector to 3.7 percent for energy stocks. As a result, the S&P 500 is down 1.4 percent so far this month.
What was so discouraging, says S&P chief investment strategist Sam Stovall, "was that there was no place to hide." Indeed, in addition to sectors, S&P breaks out the U.S. stock market into 130 "subindustry" groups. Of those 130, 126 lost ground during Thursday's drubbing.
"Obviously, two big questions remain," Stovall says. "What will happen in today's trading action, and have we seen the worst of this selloff?"
The answer to the latter question may depend on how stock investors view the health of housing.
Thursday's Dow plunge followed confirmation that demand for single-family homes is turning stone cold and that troubles in the subprime mortgage market, which caters to borrowers with poor credit histories, is starting to hurt corporate earnings.
Now, the fear is that the troubles with subprime mortgages—and bonds that are backed by them—will bleed into the broader economy. "The rationale is that if these defaults extend into the prime mortgage area and further impact consumer spending, economic growth would slow," says Brandon Thomas, chief investment officer for Envestnet Asset Management. "This, in turn, would depress earnings growth and temper stock market gains."
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