Video: Market volatility: How to invest

By Roland Jones Business news editor
msnbc.com
updated 7/27/2007 8:06:13 AM ET 2007-07-27T12:06:13

Stock prices plunged Thursday, sending the Dow Jones industrial average down more than 300 points as the downturn in the nation’s housing market showed signs of worsening, sparking concerns about a broader economic slowdown.

The huge stock sell-off extended weeks of volatility for Wall Street. A series of frenetic sessions over the past month — including many triple-digit swings in the Dow — have reflected investors’ attempts to grasp whether the turmoil in the mortgage market is confined to the a narrow segment of the industry or will lead to more widespread problems.

Thursday’s sell-off was the worst since markets plunged worldwide in February. At one point during Thursday’s session the Dow was off as much as 449 points, although prices recovered somewhat in the last hour of trading.

Traders attributed the market’s improvement to comments from Treasury Secretary Henry Paulson, who in an interview on Bloomberg TV downplayed the economic impact of so-called subprime mortgages — loans made to home buyers with poor credit histories.

At the close the Dow, which last week closed at a record 14,000, was off 311.50 points or 2.3 percent, ending the day at 13,473.57.

Prices on Treasury securities such as bonds rose as investors moved money away from stocks and into the relative security of fixed-income investments. That suggests investors have decided that problems affecting subprime loans will spread, leading to a more difficult environment for corporate borrowing that ultimately could hamper economic growth, said Hugh Johnson, chief investment officer of Johnson Illington Advisors.

“When you have this sort of sharp decline in stock prices and a rise in bond prices investors are saying they’re deeply concerned about the outlook for the economy,” Johnson said.

A sharp rise in oil prices, which are trading near $77 a barrel for the first time since last summer, and mixed second-quarter earnings reports from major names like Ford and Exxon Mobil were factors in the market drop, but not hugely significant ones, Johnson added.

“It’s not all about oil or earnings — they are part of our daily lives now, and they don’t cause this sort of decline,” he said.

The anxiety on Wall Street was amplified Thursday when the Commerce Department reported that sales of new homes fell 6.6 percent last month to a seasonally adjusted annual rate of 834,000 units, a much bigger decline than had been expected and the largest percentage drop since sales fell by 12.7 percent in January.

Disappointing results from home builders Pulte Homes and D.R. Horton — squeezed by a sluggish environment from home sales and continued defaults in subprime loans — also weighed heavily on the market.

Major Market Indices

The disappointing news from the housing sector played on Wall Street’s fear that adverse credit market conditions are spilling over into the financing of corporate deals. A flood of takeovers has helped to drive the market’s record run since early March, and Wall Street is concerned the flow of deals might dry up because private equity companies are having difficulties accessing credit.

“Worries that have been out there for the past couple of years are coming to a head right now,” said investment strategist Edward Yardeni, president of Yardeni Research. “It’s showtime.”

More pain lies ahead for those institutions that financed the now-cooling housing market, according to data released Thursday by Moody’s Economy.com, which anticipates that the national housing slump could lead to billions of dollars in losses for Wall Street investors as it drags on for at least another year and mortgage defaults increase.

More than 1.2 million first mortgage loans will default this year, according to Economy.com, and another 1.3 million will follow next year. That compares with about 900,000 defaults last year and about 800,000 in 2005, according to Mark Zandi, the Web site’s chief economist.

The mortgage industry already has seen a surge in defaults and anticipates an upswell in coming months as many adjustable mortgages begin to reset to higher interest rates.

Many of the loans were issued in 2005 and 2006 during the height of the housing boom.

“It’s very clear that the institutions that financed the housing bubble, most importantly banks and institutional investors, are all badly bruised, and it looks like they’ll be bruised more in the future,” Johnson said. “So the real issue now is, will these big lenders who make the economy go jump into the bunker? Is the money machine shutting down?”

Johnson said he thinks the market is overreacting to the credit concerns.

“I think this is a very emotional response,” he said. “The question is, does this accurately reflect what lies ahead for the economy? Is this [credit problem] really systemic? Will it really harm the U.S. economy? I don’t know the answer, but my guess is no.”

The broader Standard & Poor’s 500-stock index dropped 35 points, or 2.3 percent, having dipped below the 1,500 level for the first time since June 27. The Nasdaq composite index tumbled 49 points, or 1.8 percent.

The market indexes fell so steeply at one point Thursday that the New York Stock Exchange imposed trading curbs, which limit trading when market volatility is especially high.

In individual stock action, a drop in quarterly profit at Exxon Mobil wiped out more than $16 billion in market value of the world’s largest publicly traded company. Exxon’s stock slid 4.8 percent to $88.33.

And Dow Chemical reported a slight increase in quarterly earnings, but its shares fell 5.2 percent to $43.32, as some analysts argued that a lower-than-expected tax rate helped boost earnings more than improved demand.

The Associated Press and Reuters contributed to this report.

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