This week the S&P 500 index lost everything it had gained the week before, leaving it down 1 point over the two-week period. The reason for the decline this week was simple. Concerns remain about the economic outlook. The focal point of these concerns is the risk that troubles in the sub-prime mortgage sector will have a broader economic impact.
The market started the week fine. The S&P gained 4 points on Monday despite a warning from Countrywide Financial that its earnings would be hurt by problems in the non-prime sector.
The problems erupted on Tuesday. The MBA said that delinquencies on sup-prime mortgage loans hit 13.3%. That is the highest since the third quarter of 2002. Countrywide's CEO used the term "liquidity crisis" in reference to the sub-prime issue. A mini-panic set in. The S&P plunged 29 points.
Stability returned through the end of the week. The S&P recovered 10 points on Wednesday and 5 on Thursday. On Friday, the index lost 5 points, but that was due more to concerns about weekend risk than any specific sub-prime issues.
It is possible that some of the fears about the risks associated with the sub-prime issue eased as the week progressed, but it is also possible that these fears could erupt again in the near future. It is also possible that other reasons for selling arise, and that sub-prime gets pulled into the fray. The sub-prime issue persists.
The negativity associated with sub-prime mortgages was evident in a Wall Street Journal survey on Friday. The headlines said "Subprime Mortgage Woes are Likely to Spread" but the specifics belied the headline. Only 19% of economists said that it was very likely that the issue would have an impact on the prime market. And economists had only lowered their first quarter real GDP forecasts to a 2.3% annual rate of growth from 2.5% a month ago. That isn't much of a reduction, and it certainly isn't a recession. Earnings forecasts have yet to be broadly lowered either, but that doesn't mean the sub-prime issue will go away.
There were only a few earnings releases this week. Goldman Sachs had another great report. Lehman Brothers and Bear Sterns posted decent numbers. General Motors disappointed, but at least posted a profit.
The economic releases were also mixed. February retail sales were up a modest 0.1% due in part to cold weather. February industrial production rose 1.0% as the key manufacturing component was up a solid 0.4%. The core PPI for February was up a stronger than expected 0.4%, but the core CPI for February was in line with expectations at +0.2%.
The mix of data did little to alter economic perceptions. Economic growth is sluggish, and there are concerns that the housing sector will become an increasing problem. The modest core CPI increase eased inflation fears that briefly arose with the PPI data. Inflation is widely expected to hold steady of ease in the months ahead due to weak economic demand.
Market risks are believed to lie more with the economy than with inflation.
That is reflected in Fed policy expectations. The fed funds rate futures currently reflect expectations of a 1/4% rate cut by August.
Oil prices ended the week at $57.11 a barrel, down a bit for the week but hardly a focus. The 10-year note yield dipped slightly to 4.55%.
Market sentiment remains dicey. Reaction to any signs of economic weakness could be exagerrated. Any negative news from the sub-prime mortgage market will undoubtedly be the top talking point that day. But the fundamentals have been steady in terms of the economic, earnings, inflation, and interest rate outlooks.
| Index | Started Week | Ended Week | Change | % Change | YTD |
| DJIA | 12276.32 | 12110.41 | -165.91 | -1.4 % | -2.8 % |
| Nasdaq | 2387.55 | 2372.66 | -14.89 | -0.6 % | -1.8 % |
| S&P 500 | 1402.85 | 1386.95 | -15.90 | -1.1 % | -2.2 % |
| Russell 2000 | 785.12 | 778.77 | -6.35 | -0.8 % | -1.1 % |
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