Wall Street Shaken Again

Poor business results from banks and investor doubts regarding strong quarterly earnings from companies last week resulted in a decline in stock market indices on leading global capital markets. On the very 20th anniversary of the stock market crash of 1987, specifically on October 19, American stock indices lost 2.5 percent of their value.

The New York Dow Jones index plummeted 4.1 percent on a weekly basis, to 13,552 points. The S&P index fell 3.9 percent, to 1,501 points. This is the worst weekly performance of these indices since the end of July. The technology Nasdaq dropped 2.9 percent, to 2,725 points. The biggest impact on trading on Wall Street was the announcement by Citigroup’s Chief Financial Officer Gary Crittenden that the situation with consumer loans in this quarter in the U.S. is likely to worsen due to the rising number of borrowers failing to repay their mortgage loans. His statements triggered the largest drop in Citigroup’s stock price in the past two months, dragging down the entire banking sector. Citigroup’s stock thus fell by 3.4 percent, further pressured by the bank’s announcement that it would suspend its stock buyback program after a 57 percent drop in third-quarter earnings.

Investor concern was also sparked by Bank of America announcing an unexpectedly strong drop in profits due to problems in the subprime mortgage markets. Its stock therefore fell by 2.4 percent. Furthermore, Wells Fargo recorded the modestest earnings growth in over six years, resulting in a 3.9 percent drop in its stock price. The stock of credit card company American Express also fell by 2.3 percent, as did Bank of America’s, by 1.8 percent.

"We are facing the harsh reality of the earnings announcement season, which is causing chills in many sectors, such as finance. The disappointing earnings so far have prompted investors to focus on negative factors, such as rising oil prices, which they have ignored in recent months," explains Emanuel Weintraub from Integra Advisors. The trend of falling prices was further pressured by the announcement from Citigroup, Bank of America, and JPMorgan Chase about the establishment of a fund through which banks want to buy bad mortgage bonds from investment funds and other debts to prevent new shocks in the market due to the intensification of the credit crisis. 

Stock prices were also adversely affected by the surge in oil prices to a record level above $90 per barrel, which fueled fears of rising inflation and a decline in personal and corporate consumption. "Oil prices, the establishment of a large banking fund which actually announces new problems, and Citigroup’s forecast have pressured stocks, supported by a strong psychological factor, as it is the 20th anniversary of the 1987 stock market crash. We are facing a multi-headed dragon," concludes Peter Kenny from Knight Equity Markets. On the very anniversary of the 1987 stock market crash, on Friday, construction equipment manufacturer Caterpillar shook investor confidence by announcing that the U.S. economy will be close to, and possibly even in, recession next year. Several industries served by the company are already in recession, stated Caterpillar executives. The company’s stock fell by 5.3 percent, dragging leading global indices into the red that day.

European stock indices were also affected, primarily due to the profit warning from telecommunications equipment manufacturer Ericsson, which crashed its stock prices and unsettled investors already worried about the credit crisis and a possible recession. Thus, the London FTSE weakened by just over three percent in the past week, to 6,528 points. The Frankfurt DAX index was down about two percent, dropping to 7,884 points. The worst performance was recorded by technology company stocks, led by Ericsson, whose shares plummeted by more than 25 percent due to the profit warning. The Swedish company announced that its earnings in the third quarter would be below market expectations and its own estimates, due to an unexpected change in its business mix.

Nokia’s shares weakened by 2.1 percent, and Alcatel-Lucent’s shares by 4.5 percent, also affected by the news that WestLB downgraded their investment rating. Among German companies, the biggest loser was Siemens’ stock as stories circulated in the market that it might issue a profit warning. Its shares weakened by 2.9 percent. Investors turned their attention to data on company earnings and acquisition activity, which usually boosts stocks. "The trend of earnings growth is somewhat stronger in Europe due to a smaller decline in economic activity compared to the U.S.," said BNP Paribas strategist Edmund Shing. "Also, all the restructuring taking place in European companies supports this trend, while in the U.S., restructuring is already nearly complete."

The Tokyo Stock Exchange Nikkei index weakened by almost three percent during this period, ending the week at 16,814 points, the lowest level since the end of September. (H)