The stock market this week is hoping for signs that the economy is surviving the problems in the financial sector — and that the Federal Reserve will come to the rescue if it’s not.
Investors are slowly getting a clearer picture of how much in risky and deteriorating debt securities the world’s major financial institutions are holding, and they don’t like what they see.
Wall Street already expects banks’ portfolios to lose at least $20 billion in the fourth quarter, after announcements of anticipated writedowns of mortgage-backed securities and other debt instruments by such financial institutions as Citigroup Inc., Morgan Stanley and Wachovia Corp.
Investors have been bracing for fourth-quarter writedowns for a while, but the amount was larger than many were prepared to hear. As a result, volatility has returned to virtually all corners of Wall Street.
After huge swings in either direction, the Dow Jones industrial average finished last week down 4.06 percent, and the Standard & Poor’s ended down 3.71 percent.
The Nasdaq composite index was hit the hardest last week, as investors’ optimism vanished about the technology sector being isolated from the slowing economy and problems in the financial markets. The Nasdaq ended the week down 6.49 percent.
Meanwhile, gold lifted further above $800 an ounce to its highest levels since 1980, and crude-oil briefly breached $98 a barrel, as the dollar plunged.
The combination of shaky financial markets and inflationary triggers has worried investors that the Fed’s hands are tied. An interest rate cut could send the dollar down even further, but keeping rates where they are might translate to even wider losses for the world’s major financial institutions.
On Oct. 31, the Fed lowered key interest rates by a quarter point, as expected, after reducing rates by a half-point in September. But the central bank suggested that it may stop cutting rates when it meets Dec. 11.
Mild readings on producer prices and consumer prices — which will be reported on Wednesday and Thursday, respectively — could help calm the market. As of last Friday, economists surveyed by Thomson/IFR predicted, on average, that both the core Producer Price Index and the core Consumer Price Index will have risen by 0.2 percent.
Wall Street will also want to see strong October retail sales detailed in the Commerce Department’s Wednesday report, and solid readings on October industrial production and capacity utilization on Friday.
And there are still a few major earnings reports left for investors to read to gauge U.S. business growth and the health of the consumer. Tyson Foods will post its quarterly results on Monday; Home Depot Inc. and Wal-Mart Stores Inc. release their third-quarter results Tuesday; Macy’s Inc. reports Wednesday; and Starbucks Corp. reports Thursday.
The bond market is closed Monday for Veterans Day, but the stock market is open.