The stock market has come tumbling back to earth.
The Dow Jones Industrial Average's precipitous drop Friday has pulled blue-chips lower for the week, swiftly ending hopes that U.S. stocks were ready to rally. Stocks have lost the momentum built since hitting their lowest point of the year two weeks ago, and are now stalling just as second-quarter earnings season heats up.
The retreat comes as investors grapple with two uncomfortable prospects: lackluster corporate earnings and a cooling economy. Nowhere is that clearer than in financial stocks, which many traders use as a leading indicator for how the broader market will perform.
"People are looking at bank earnings and they are not seeing any growth," said Charles Mercer, portfolio manager of the Aston/Todd-Veredus Select Growth Fund. "They're not seeing any expansion of these banks' balance sheets that points toward any loan demand. That is one the factors that's been a scare in the market here since April."
Stocks suffered a bruising second quarter, with the Dow falling nearly 10% and the Standard & Poor's 500 giving up close to 12%, as fears of the impact of a euro zone sovereign debt crisis and the prospect of a slowing global economy swirled. The end of the second quarter also coincided with a ratcheting up of fears about a potential slowdown in the U.S. economy.
Stocks rebounded last week and early this week, as initial optimism about second-quarter earnings briefly wiped the economic concerns from the radar. But weakness in earnings from large banks -- along with more downbeat economic data -- has brought those fears roaring back.
The market's plunge came after Citigroup Inc. and Bank of America Corp. issued disappointing quarterly reports, and forecast the future will remain turbulent. Investors are also worried about how big banks will profit if their trading operations are hurt by new federal financial regulations.
Bank of America dropped over 9% in late-afternoon trading, and was the biggest decliner of the Dow's 30 components. The blue chip index, which ended down 261.03 points, or 2.5%, at 10097.97, is down 1% for the week, though it's still up 3.3% for the month.
The earnings reports startled investors who just last week were betting that earnings would come in largely better than expected. Initial reports from Alcoa and Intel seemed to support that. Investors hoped that a strong batch of earnings would overshadow any concerns about the economy -- but some of the reports have proven too difficult to ignore.
Economic data in the past week have shown that consumers are gloomy, manufacturing is slowing, and the Federal Reserve trimmed its outlook for 2010.
Other markets are flashing warning signals too. Interest rate futures markets are signaling an increasing shift in expectations that the economy could fall back into recession after a brief recovery, with the September and December Eurodollar futures contracts heading for a rare inversion. That has in the past indicated a contracting economy.
The Treasurys market continues to flag a slowdown in the economy, with the 10-year Treasury yield trading below 3% after falling there around the end of the second quarter.
In contrast with stocks, bonds are up for the week with the 10-year yield down more than 0.1 percentage point. Bond yields move inversely to prices.
In the currency markets too, the dollar has been under pressure for some time - the euro briefly breached the key $1.30 level on Friday - as concerns about the U.S. economy dominate just as investors have become less worried about the euro zone.
Source: JOE BEL BRUNO
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