On Friday (November 2nd) US markets avoided a replay of the previous session's bloodletting despite another brutal day for financial stocks, which continued to slide amid growing fear that credit-market problems have yet to do their worst to the balance sheets of banks and brokerages.
The Dow Jones Industrial Average gained 27.23 to 13595.10, but that wasn't enough to undo Thursday's damage, and the blue-chip benchmark ended down 1.5% for the week. The S&P 500-stock index added 1.21 points to 1509.65, but it finished off 1.7% on the week. The Nasdaq Composite Index advanced 15.55 to 2810.38, ending the week with a modest 0.2% gain.
Financials again logged heavy losses amid continued concern over the exposure of banks and Wall Street firms to troubled credit instruments, but closed off of session lows. Merrill Lynch closed down by 7.9% after The Wall Street Journal reported that the company, attempting to slash its exposure to risky mortgage-backed securities, engaged in transactions with hedge funds that may have been designed to delay reckoning on losses. Merrill responded in a statement that it "had no reason to believe that any such inappropriate transactions occurred. Such transactions would clearly violate Merrill Lynch policy."
Other financials also felt the pinch. Bear Stearns fell 5.4%, Morgan Stanley lost 5.6%, Lehman Brothers declined 0.6% and Goldman Sachs lost 4.4%. J.P. Morgan, which had reported a relatively strong third quarter and appeared to handle the credit squeeze better than many of its peers, fell 2.6%.
"There's a high likelihood the fourth quarter will be a kitchen-sink quarter [for financials], with a lot of charges," said Phil Dow, of RBC Dain Rauscher, who noted that finding the extent of banks' subprime exposure takes time, and that a possible rescue of banks' ailing structured investment vehicles may fail.
Serious weakness in bank and broker shares has now stalked the markets for two sessions in a row. Analyst downgrades of Citigroup catalyzed heavy losses Thursday, when all three major stock indexes lost more than 2% of their value. Citi fell another 2% Friday, but the stock came off its lows on reports that Citi's board would hold an emergency meeting this weekend. It wasn't clear what the meeting's agenda is, but the subject of further writedowns could come up.
Though financials are ailing, some analysts argue that the economy as a whole is sound. "Factory orders were good, initial claim numbers were good, GDP was good," said Jim Paulsen, of Wells Capital Management. "The market isn't trading on economic fundamentals. Wall Street has a pessimism complex."
As has frequently been the case recently, tech stocks proved a notable pocket of strength. Amid the intraday swoon, the tech-heavy Nasdaq held up better than other benchmarks. Google and Intel both closed up 1.1%, and Hewlett-Packard added 1.8%. Research In Motion shares climbed 4%.
Markets appeared to receive an encouraging economic signal from a report that showed employers added 166,000 jobs to nonfarm payrolls in October, double the mean expectations of Wall Street economists. The unemployment rate was steady at 4.7%
