Just when it seemed like the capital markets couldn’t get much gloomier, they did. All the major stock market indices took a plunge late last week, as the latest batch of corporate warnings across a variety of sectors spooked investors, who promptly went on a selling binge. Bad news from the likes of Dell, Ford Motor and the Gap, pushed the Dow Industrial Average down 151.75 points on Friday, and led to a 1.68 percent loss for the week. Meanwhile, the NASDAQ declined 4.57 percent last week, while the S&P posted a 2.37 percent weekly loss.
The blows to the stock market, however, gave a lift to Treasuries. The 10-year Treasury note rose 27/32 to 100 10/32 as of market close on Friday. The yield on the government paper fell to 4.83 percent. The 30-year Treasury bond rose 28/32, to 99 11/32, with the yield dropping to 5.42 percent.
Corporate spreads widened late in the week. Both investment grade and lower rated corporate bonds lost ground versus Treasuries due to the weak Philly Fed data and the strong rally in Treasury securities. S&P’s Investment Grade Credit Index rose 1.1 bps to close Thursday’s session at 209.0, but remains within its two-month range of 200 to 210. Meanwhile, S&P’s Speculative Grade Credit Index rose 3.6 bps to close at 950.5, staying in the 945 to 955 range for two weeks now.
A flurry of economic figures late last week further blurred the environment for already cautious investors. The trade deficit widened 3.3 percent in June to $29.4 million, its lowest level in 16 months, and the consumer price index posted its second drop in 15 years, dipping 0.3 percent in July as the dollar strengthened, energy prices declined and the global economy continued to slow.
The Economic Recovery’s In the Mail?
Now, for the bad news. According to researchers at the University of Michigan, two-thirds of consumers still believe the economy is slowing — and that it won’t pick up again until late next year. That’s a ways off from the optimistic notion some economists and investors were espousing last month. Those prognosticators predicted the economy would show signs of recovery later in the year or early in 2002.
What’s more, the University of Michigan survey found that a mere 18 percent of consumers plan to spend their tax rebate checks right away, choosing instead to save it or pay down their debts. Not exactly the lifeline sagging corporate profits needed.
Given the state of the equities market, it’s not surprising that the IPO market has absolutely dried up. No companies are slated to come out of the gate this week, and the painful track record set by recent issues isn’t overly encouraging. Last week, for instance, Bermuda-based insurer Max Re Capital was the only company to brave the chilly IPO waters. But before launching the company reduced the price and size of the offering. Then, on the first day of trading, shares of Max Re Capital traded below the initial offering price.
Don’t expect venture capitalists to come to the rescue, either. According to a Pricewaterhouse Coopers study, VC funding fell to $8.2 billion in the second quarter, down from $10.4 billion in the previous period. That’s a 77 percent drop from VC invesment in the second quarter of 2000. Not surprisingly, the communications and networking sector were hit hardest by the lack of venture funding, but PwC notes that consumer business services and software companies were also affected.
Once More into the Breach
All this bad news makes it a virtual certainty that the Federal Reserve Board will cut interest rates tomorrow. The only question at this point seems to be how big the cut will be. Most analysts and investors have been expecting a 25 basis point reduction in the Federal Funds rate for some time now. But the black cloud that spread across Wall Street has some analysts predicting the Fed will weigh in with a 50 basis point cut.