Continued Growth in Stock Markets

The record value of the Dow Jones at the beginning of the week signals that investors in global stock markets are increasingly convinced that the global credit crisis is nearing its end and that it will not spill over into the entire U.S. economy.

Although profit-taking sales followed on Wall Street from Tuesday, a generally stable mood prevailed in the markets last week. The New York Dow Jones index strengthened by 1.2 percent on a weekly basis, reaching 14,066 points. The S&P index rose by two percent, closing on Friday at 1,562 points. The technology Nasdaq strengthened by 2.9 percent, reaching 2,785 points, the highest level since January 2001. On Monday, the value of the New York Dow Jones index reached a record value as investors were inclined to believe that the credit crisis was over after three global banks reported their losses due to the crisis. Thus, on the first day of the fourth quarter, the Dow reached 14,088 points, strengthening by 1.4 percent. This is its 33rd record value in 2007 and the 55th since the market began its rise a year ago. During trading on Friday, it even touched 14,124.54 points, the highest level ever recorded.

American Citigroup reported a 60 percent lower quarterly profit due to exposure to struggling credit markets, but investors were comforted by the CEO of the largest global bank, Charles Prince, stating that a return to a normal business environment is expected in the fourth quarter. The bank’s stock strengthened by 2.3 percent. Analysts point out that Citigroup’s business report, which coincided with similar reports from Swiss banking giants UBS and Credit Suisse for the third quarter, suggests that the losses of these banks due to the crisis in the U.S. subprime mortgage market and other risky loans will not have a lasting impact on the financial sector.
“What convinced me that companies will perform well in the face of the credit crisis is Citigroup’s very aggressive stance in reassessing the true value of its portfolio. I believe that other financial institutions will act in the same way,” stated Ernie Ankrim, an investment strategist at Russell Investment Group.

The next day, profit-taking sales of stocks followed. “After a huge price surge the day before, it is normal for profit-taking to follow. The market believes that banks have taken their medicine, that they have recognized their problems, and that they are addressing them,” said Stephen Massocca, CEO of investment bank Pacific Growth Equities. Stocks of technology companies, which had one of the best performances in the markets in recent weeks, significantly weakened on Wednesday after Morgan Stanley brokers announced that a price war was brewing in the chip sector. Thus, Intel’s stock weakened by 2.2 percent, and Nvidia Corp. by 4.2 percent. On average, the stock prices of these companies lost 2.1 percent in value, marking their largest decline in about a month.

At the end of the week, the market was boosted by data showing employment growth in September above expectations. Specifically, the U.S. economy created 110,000 new jobs, exceeding expectations that hovered around 100,000. This strengthened investors’ belief that the economic performance of the U.S. is better than previously thought. On European exchanges, stock prices reached their highest levels in the last 10 weeks, as investors find comfort in banks transparently discussing their problems due to exposure to the crisis in global credit markets. The London FTSE index rose by nearly two percent on a weekly basis, reaching 6,596 points. The Frankfurt DAX strengthened by 1.8 percent, reaching 8,002 points.

Bank stocks, hardest hit by a 13 percent drop in prices on European stock markets between mid-July and mid-August, are now posting gains after banking giants, American Citigroup and Swiss UBS, issued their profit warnings, removing uncertainties related to losses caused by the credit crisis. Deutsche Bank’s shares strengthened by 1.4 percent after the largest German bank announced that its net profit in the third quarter should exceed 1.4 billion euros. The bank also disclosed its losses related to the crisis in the U.S. mortgage market, joining other major banks that have done so in recent days. Societe Generale recorded a stock price increase of 0.8 percent after confirming its forecasts for 2007-2008 despite what it described as difficult market conditions in the third quarter. Among other banks, HSBC shares gained 1.2 percent, Royal Bank of Scotland by three percent, and Barclays by 1.3 percent.

Analysts say that there could be a correction in the market in the short term, but that stocks still represent a good investment in the long term. “We are happy about the recovery of the stock market, just as we were optimistic during the crisis, but I believe that it may be time to realize profits in the short term,” said Thierry Lacraz, a strategist at Pictet & Cie. The Tokyo Stock Exchange Nikkei index jumped by 1.7 percent, reaching 17,065 points. (Hina)