Credit concerns down stocks
The Russell 2000 (NYSE: IWM) and the Dow abruptly reversed their earlier course and fell hard following more news of credit troubles. The small-cap index lost 11.33 points, or 1.49%, to 751.54, its third consecutive decline and its lowest close since November 2006, The Dow Jones Industrial Average (INDU) dropped for the fifth straight day, falling 167.45 points, or 1.29%, to 12,861.47, the first time it has closed below 13,000 since April 24.
Stocks were rising but had their wings clipped at about 2 p.m. ET when financial services giant Merrill Lynch & Co. (NYSE: MER) downgraded home lender Countrywide Financial Corp. (NYSE: CFC) to “sell” from “buy,” citing concerns that liquidity problems could overwhelm the company.
Investors saw that as the latest sign of spreading fallout from the meltdown in the subprime mortgage market.
The ensuing sell-off was steep, with the Russell 2000 losing a cumulative total of more than 20 points in two hours, while the Dow shed more than 200 points.
Today’s downgrade follows an announcement on August 10, when Calabasas, Calif.-based Countrywide, the largest U.S. mortgage lender, said that it has enough funds but warned of possible problems in the future.
To make matters worse, the slump in the U.S. housing sector that started in the second half of 2006 and led to rising defaults and delinquencies shows no signs of improvement.
The National Association of Home Builders/Wells Fargo reported this morning that its index of builder confidence fell to 22 in August from a level of 24 in July. That’s its worst performance in 16 years. A reading below 50 indicates that the majority of respondents view conditions as poor.
“Builders realize that issues related to mortgage credit cost and availability have become more acute, filtering some prospective buyers out of the market,” said Brian Catalde, the trade association’s president. “There is no question that problems in the subprime mortgage sector have spilled over to other components of housing finance.”
But stocks were actually on track to close higher before news of the downgrade sent a chill through Wall Street.
That’s because the U.S. Labor Department reported before the opening bell that core inflation, which excludes the volatile costs of food and energy and is the Fed’s preferred measure, rose 0.1% in July, following a rise of 0.2% in June.
Economists were projecting an increase of 0.2%.
For the 12 months through July, wholesale prices are up 4%, while core prices are up 2.3%.
The U.S. central bank has said that it prefers core prices to stay in the range between 1% and 2%, meaning that today’s numbers should calm officials but not prompt them to lower interest rates during the Fed’s next meeting.
Separately, the Fed reported that industrial production rose 0.3% in July, in line with economists’ expectations. Production added 0.6% in June.
Industry makes up about 20% of U.S. GDP.
