All three indexes are now solidly in red territory for the year and are off 10 percent from their recent highs two weeks ago.
The declines have been driven largely by fears that the European debt crisis could spread to Spain and Italy and worsen economic slowdowns underway in Europe and the United States. But Friday brought respite on two fronts: Italian officials announced efforts to accelerate their plans to bring their budget into line, and an upbeat U.S. jobs report showed the economy created 117,000 jobs in July, 32,000 more than economists had expected.
Still, investors struggled with how to digest the news and sent U.S. markets on a wild ride on Friday marked by a 1.5 percent jump near the opening bell and a fall of more than 2 percent shortly before noon. The Dow eventually finished up 0.54 percent, the S&P nearly broke even, and the Nasdaq tumbled nearly 1 percent. The VIX, an index of market volatility that has come to be known by traders as the “fear index,” reflected the large swings, spiking to nearly 40 points, its highest level since July 2010.
Market strategists blamed volatility on investors’ worries that they might be facing a global financial crisis like the one that roiled their portfolios in 2008.
“The overarching issue is that investors are just absolutely not going to go through 2008 all over again,” said Bill O’Grady, chief market strategist for Confluence Investment Management in St. Louis, which manages $850 million on behalf of individual investors. Thursday’s heavy sell-offs, which sliced more than 4 percent off U.S. stock markets, reminded investors of 2008, prompting them to think, “I’m done — get me out,” O’Grady said.
But O’Grady sees major differences between today’s market and 2008. For one, banks have more cash on their books than they did then and are still lending to one another at relatively low rates compared with U.S. government debt, he said.
Government lending rates are also indicating little risk of a repeat recession, said Jeff Saut, investment strategist at Raymond James in St. Petersburg, Fla. He bases that conclusion on the steepness of the yield curve, which tracks the difference between the U.S. Treasury’s 30-year borrowing rate and the borrowing rate for shorter time horizons. In early 2008, the yield curve was nearly flat, which typically indicates a recession is looming, while now the yield curve shows a sharp incline.
“It’s been arguably the best predictor of future recessions, and the shape of the yield curve is telling you that there is no recession coming anytime soon,” Saut said, adding that he predicts the market will rally soon from current levels.
Because stocks are relatively cheaper now than they were before their slide in 2008, investors have less to lose if prices continue to fall, Saut said. In June 2008, the Standard & Poor’s 500-stock index was worth about 25 times the recent earnings of its component companies; today, it is trading at a more modest 11 times their expected earnings, he said.
But others see more-troubling differences. When things went from bad to worse in the fall of 2008, the Federal Reserve had the ability to step in with unprecedented amounts of money to help out struggling banks and pump cash into the economy. These days, “it’s all off the table,” said Steven Ricchiuto, chief economist at broker-dealer Mizuho Securities USA in New York, because the Fed has already exhausted most of its weapons to fight the downturn.
“They have nothing to offer that’s substantive,” Ricchiuto said.
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