WASHINGTON -- Fresh fears - about U.S. consumers, real estate and hidden credit risks - have once again sent North American stocks spiralling downward.
Each of the major U.S. stock indexes lost more than 2 per cent of their value yesterday, including the blue-chip Dow Jones industrial average, the S&P 500 index (down 34.43 points to 1,432.36) and the technology-laden Nasdaq composite index.
The grim mood spilled over into Canada, where the TSX also fell sharply, dropping 1.65 per cent.
The losses make it clear that investors aren't convinced the once-booming U.S. economy can avoid a recession in the coming months.
The downdraft started early yesterday after broker Merrill Lynch downgraded to "neutral" from "buy" three leading financial institutions - Bear Stearns Cos. Inc., Lehman Brothers Inc. and Citigroup Inc. - because of their exposure to real estate, mergers and the debt market.
Fears that the credit crunch is far from over was underscored by reports that State Street Corp., the world's largest institutional money manager, has nearly $29-billion (U.S.) committed to the shaky asset-backed commercial paper market.
And the selling on Wall Street and Bay Street continued amid reports on U.S. consumer confidence (down), house prices (down), and the thinking of Ben Bernanke and his Federal Reserve Board colleagues (still obsessed with inflation).
"Developments in global financial markets are infecting investor, business and consumer psyches," said economist Ryan Sweet of Moody's Economy.com in West Chester, Pa.
The mood of Americans is growing darker, along with the slumping value of their homes, pensions and stock portfolios, according to the U.S. Conference Board. The board's monthly consumer confidence index tumbled in August by the most since hurricane Katrina two years ago, falling nearly seven points to 105 from 111.9 in July.
The board said Americans are feeling decidedly less secure.
Among their concerns are job prospects, incomes and the ability to afford big-ticket purchases, such as cars and appliances.
"Consumers have obviously been paying some attention to financial market troubles, and this appears to have weighed on their confidence," said analyst Adam York of Wachovia Securities.
Consumer confidence doesn't always dictate spending patterns, and so far consumer spending has held up relatively well in the face of all the turmoil. Even consumer confidence remains at a historically high level, in spite of this month's drop.
The latest pulse of consumer confidence - the first since the mortgage credit crunch erupted earlier this month - coincided with a report that showed that the rate of decline in home values accelerated in June.
Home prices in the top 10 metropolitan markets fell 4.1 per cent from a year ago, according to the S&P Case-Shiller index. It was the sixth consecutive monthly decline.
In recent years, U.S. homeowners have used their homes as credit cards, tapping into their equity for lines of credit and larger, interest-only mortgages. But the borrowing frenzy seems to be coming to a halt.
Economists worry that falling real estate values and slowed construction activity will infect the broader economy. And tighter lending standards by banks aren't yet reflected in the latest house price figures. When the dust settles, price declines from peak to trough could well hit double digits across the U.S., erasing billions of dollars in wealth.
Most economists aren't yet forecasting a recession for the U.S. in the months ahead. But the latest data suggest the slowdown is accelerating.
Consumers aren't the only ones fretting about financial markets and the mortgage meltdown. Mr. Bernanke and members of the Fed's rate-setting committee acknowledged that they toyed with the idea of a rate cut when they met Aug. 7, according to meeting minutes released yesterday.
The Fed said worsening "financial conditions could not be ruled out and, to the extent such a development could have an adverse effect on growth prospects, might require a policy response."
The Fed also said that falling house prices and tighter credit for home equity loans could weigh on consumer spending.
But Mr. Bernanke's overriding concern was inflation, not economic weakness, the minutes show.
The Fed, which doesn't meet again until Sept. 18, moved 10 days after the August meeting, cutting the rate it charges to borrow from its emergency "discount window" to 5.75 per cent from 6.25 per cent.
By then, the Fed had come to the conclusion that the financial turmoil had increased the risk to the broader economy "appreciably."
The bank's benchmark federal funds rate remains fixed at 5.25 per cent. Most economists expect at least a quarter percentage-point cut on Sept. 18, and likely another one before the end of the year.
© The Globe and Mail
