U.S. stock markets took investors on a wild ride Thursday, plunging dramatically in the morning only to recover sharply in the afternoon.
“This is a very emotional market,” said Robert Weissenstein, chief investment officer with Credit Suisse’s private banking group for the Americas, while watching the Dow suffer a 300-plus-point drop.
“At the margins, things feel less comfortable, but it won’t take the economic framework apart,” he said.
Shock waves from a widening credit crunch rocked Asian and European stock markets and then reverberated back to send U.S. stock prices lower for the fourth day this week.
In London, the FTSE 100 lost 4.1 percent; France’s CAC-40 declined 3.3 percent and Japan’s Nikkei 1.99 percent.
The Dow Jones industrial average seemed on track to follow course when it dropped more than 340 points, wiping out all of its gains for the year and exceeding the 10 percent decline from a peak that defines a correction.
A rally in the final 45 minutes of trading took the Dow into positive territory before it closed down 15.69 points at 12,845.78.
The Standard & Poor’s 500 index rose 0.32 percent to close at 1,411.27, and the Nasdaq composite fell 0.32 percent to 2,451.07.
Don’t expect markets to calm down this week or next, but in a couple of months investors should have more clarity on what the unwinding in credit markets will mean, Weissenstein said.
“People are asking who holds the bad loans, how much do they own and what will the impact be on the rest of the market,” said Alan Skrainka, chief market strategist with Edward Jones in St. Louis.
Big investors hit hard
Investors can’t answer those questions, he said, but they can focus on what is within their control: the quality of the securities they own, the diversification of their portfolios and their emotions.
Much of the volatility is from moves being made by large institutional investors who have found themselves with too much risk, he said.
“This decline is not hitting the small investor nearly as hard as it is hitting the sophisticated professional investor,” Skrainka said. “The average investor doesn’t own a hedge fund or junk bonds.”
Several news items unsettled markets Thursday and sent stock values tumbling.
Countrywide Financial, the nation’s largest home lender, said it had fully tapped an $11.5 billion credit line provided to it by a group of 40 bankers.
The emergency credit line was needed after bond investors cut Countrywide off on fears that too many mortgage borrowers are at risk of default.
Another large U.S. mortgage lender, First Magnus Financial Corp., said Thursday that it would stop funding home loans. Online stock broker E-Trade Financial Corp., which also makes home loans, suffered a downgrade in its credit rating on concerns that losses in the value of its debt holdings could wipe out its equity.
Moody’s Investor Service warned that markets in collateralized debt obligations had seized up because buyers and sellers aren’t able to agree on prices.
That in turn could trigger a major hedge-fund collapse on the level of Long-Term Capital Management, which roiled markets in 1998.
Yen rises against dollar
In another sign that liquidity was drying up, the value of the Japanese yen has risen sharply in recent days.
Investors borrowed large amounts of yen at very low interest rates, using the capital to purchase other assets, such as currencies, bonds and stocks.
“It was free money as long as the yen doesn’t go up,” said Frank Trotter, president of EverBank Direct in St. Louis.
The yen is up about 5 percent against the U.S. dollar in recent days as investors try to unwind those trades and raise capital.
Economic reports released Thursday weren’t especially encouraging. U.S. housing starts fell 6.1 percent in July from June, reaching their lowest level since 1996.
A manufacturing report for the mid-Atlantic states was flat as demand for manufactured goods slumped and shipments weakened.
Shares of commodity producers were especially hard hit Thursday on fears that a slowdown in global economies would shrink demand for raw materials.
Not all the news was bad. Some financial stocks rallied on growing sentiment that the Federal Reserve will have to cut short-term interest rates soon.
Rumors that Chinese investors would step in to buy a stake in Bear Stearns Cos., hammered after two of its hedge funds invested in mortgage- backed securities collapsed, lifted shares of the troubled New York investment bank.
Staff writer Aldo Svaldi can be reached at 303-954-1410 or asvaldi@denverpost.com.
