Market hits slump after volatile week

By Stewart Douglas

The U.S. stock market experienced big losses Friday, marking the end of a volatile week of trading.

After realizing triple digit increases over Wednesday and Thursday, the Dow Jones fell by 2.1% (284.8 points) down to 13,178.5 points, with the Nasdaq following at a loss off 2.5% down to 2,511.25 points. Over the whole week, the Doe Jones only experienced a net loss of a half percent, however.

Driving the decline was widespread selling in response to more concerns over the state of sub-prime lenders and other financial institutions. Several top executives in the financial industry are calling the state of the credit markets the worst they’ve seen in many years.

One week prior, Wall Street experienced what is considered a period of 5 days that were the worst it had seen in four years.

Housing woes suggest wider problems

Much of investor concern is over the possibility of issues in the housing market prompting the tightening of credit that could spill over into the greater economy. Most problematic in the residential mortgage market is sub-prime lending suffering in the wake of the Fed’s recent decision to raise interest rates in order to combat inflation.

Much of the previous investor optimism for institutions with exposure to sub-prime markets has faded as residential mortgage defaults have soared to record numbers this past year.

Even institutions outside the sub-prime market have been getting hit hard. Accredited Home Mortgages realizes loss of 31% in the value of its shares as a result of announcing its plans to shut down the majority of its operations. The largest home lending institutions together experienced a 6% loss of value in shares, including Washington Mutual and Countrywide Financial.

This has resulted in record numbers of defaults in the past year, and dented investor enthusiasm for financial companies that have exposure to the industry.

Higher interest rates have also made it more expensive and thus difficult for private equity groups to continue to finance buyouts.

This has led to concerns that the takeover boom that has been a critical driver of stock market performance over the past few years could fizzle out.

Industry experts say uncertainty and volatility is likely to persist. Trading analyst of Cowen & Co. Mike Malone says, “I think there is a tremendous amount of uncertainty with regard to the credit markets and how the situation will ultimately settle”.