Markets Flinch at Debt Ills, Rate Plan

FEBRUARY 9, 2010
By PETER A. MCKAY And E.S. BROWNING

Concerns that Greece's debt woes may spread to other nations mingled with the prospect that the Federal Reserve in the U.S. may soon begin tightening the spigot that helped fuel the markets' massive rebound. Traders cited a report in The Wall Street Journal on Monday that Fed Chairman Ben Bernanke is preparing a plan that the central bank will follow once the economy shows more signs of recovery.

Dow Jones Newswires' Paul Vigna and WSJ's Lee Hawkins details today's market losses and what it means for investors in the News Hub.

The 10000 mark on the Dow has been a frustrating milepost for American investors. The benchmark has crossed above or below the 10000 mark 57 times since first rising above that level in 1999—effectively meaning it has made no progress in more than 10 years. The latest decline could deal another blow to optimism that stocks will continue to rise.

The blue chips fell 103.84 points Monday, or 1%, to 9908.39, their lowest since early November. Banks led the decline—by one measure dropping to their lowest since August. Corporate bond markets also swooned.

The Dow industrials are now down 7.6% from their 15-month high set in January, the biggest drop since the current rally began last March. The only other significant stumble during the powerful rebound was in mid-June to mid-July, when the Dow dropped 7.1%.

Some optimistic investors are shrugging off this decline, saying that stocks were due for a pullback of about 10%. In this view, it is time to look for signs that the declines are losing steam in hopes of buying stocks cheaply. Some bulls appeared to begin buying late on Friday, helping turn the market around on that day. But bearish investors worry that the selling could take stocks down more than 10%, and that rallies like Friday's mark opportunities to sell.

Bank of America and other financials weighed on the stock market Monday.
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The current corporate earnings season has been generally favorable: More than 70% of companies in the S&P 500 stock index have beaten earnings estimates. But investors' focus over the past few weeks has been primarily on the creditworthiness of major industrialized countries, which have piled on huge amounts of debt in trying to spend their way out of a steep recession.

"Clearly, the sovereign-debt worries are first and foremost for the market right now," said Uri Landesman, portfolio manager at ING Investment Management. "We're going to need some more clarity on that before we establish a new trend."

U.S. stocks fell on a day when European markets stabilized, demonstrating investors' lingering worries about the U.S. economy. The benchmark indexes in Italy, Portugal and Spain all rose. The British market was mixed, with the FTSE 100 posting a 0.6% gain, while the broader FTSE 250 slipped 0.3%.

After a drubbing over the past few days, the euro was relatively stable against the U.S. dollar. One euro cost $1.3660 in late New York trading, down from $1.3665 on Friday.
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In the bond market, investors demanded greater compensation for owning corporate debt, driving so-called risk premiums over safe U.S. Treasurys to their highest point in a year. Investors are keeping a particular eye on the corporate bond market after a record rally in 2009. A sharp pullback could make it much more expensive for companies to finance themselves, as the economy remains sluggish.

In the U.S., trading volume in recent weeks has also been sluggish, coming in below last year's average of more then five billion shares a day for stocks traded on the New York Stock Exchange. That reflects investors' nervousness: They are reluctant to commit a lot of money either to supporting stocks or to betting against them.

On Monday, trading volume was about 4.3 billion shares as financial shares led the broader stock market lower. The S&P 500 financial-sector index hit its lowest point since mid-August. Bank of America dropped 3.5%, while American Express fell 2.8%, Travelers declined 2.5%, and J.P. Morgan Chase slipped 1.6%.

Keith W. Springer, president of Capital Financial Advisory Services, notes that market watchers had been saying for months that a pullback has been necessary, but now that the rally in stocks has come to a pause, it has been met with increased alarm.

"Every time you have a market run-up, everybody goes, 'We need a 10% correction,'" Mr. Springer said. "And as soon as the market drops 5%, you have everybody crying."

Write to Peter A. McKay at peter.mckay@wsj.com and E.S. Browning at jim.browning@wsj.com

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source: http://online.wsj.com/article/SB10001424052748703615904575053861015196590.html?mod=WSJ_hpp_sections_markets