After five years of soaring shares and an economic upswing lasting nearly as long, fear is now spreading its way through Wall Street.
Investors are worried that the debacle on the American real-estate and construction market, with its increasingly sharp drop in housing prices and shrinking new building activity, will have serious effects on more than just the mortgage market.
They fear a possible spillover spreading to the entire economy, even though every day now there are soothing tones coming from Washington’s politicians. The weak dollar is a further concern.
Around the world, interest rates are rising. The United States Federal Reserve has, in the meantime, sharply tightened the money reins, although for some time now the Fed’s main discount rate has been steady at 5,25%.
Stock exchanges and financial markets the world over are worried that the problems in the US credit market could dry up liquidity, that lubricant needed to keep the economy running smoothly.
Corporate borrowing, especially on the high-risk end, has suddenly dropped drastically. The interest on them has correspondingly shot up because investors want to be rewarded for the risks.
Now all eyes are fixed on the closest-watched market barometer, the Dow Jones Index, after it fell 312 points or nearly 2,3% on Thursday, to 13 474 points. The drop came after the index last week had hit an all-time high of 14 000 points.
Many on Wall Street are wondering: Was this only a brief setback, or is it a portent of a yet stronger and longer downturn for US shares?
Since March 2003, the American stock markets have no longer experienced a 10% downward correction of share prices.
The long upward swing on Wall Street had begun in 2002, with shares, in the meantime, having nearly doubled in value.
The times of cheap and abundantly available money appears now to be definitely over. This was the money with which US consumers financed their spending. They steadily took on increasingly larger mortgages at lower interest rates and they were rewarded with rising prices for their homes.
Now, the Americans face stagnating incomes and rising inflation, fuelled by expensive food and fuel costs.
No more boom
The boom on Wall Street in recent years had also been based on corporate takeovers totalling more than $1-trillion by financial investors. But these transactions were also virtually totally financed by borrowing, and now they have ground almost to a complete halt during the recent weeks and days.
During the past few weeks, more than three dozen new bond emissions and credit-borrowing plans totalling billions of dollars have been put on ice.
American corporate profits during the second quarter this year rose on average by only a little more than 5% — compared with the double-digit quarterly earnings rises that had gone on for years. These earnings, along with cheap interest rates and an ocean of liquidity, had all fuelled Wall Street’s long rise.
American companies have spent hundreds of billions of dollars in buying back their own shares in order to shore up the value of the stocks, but now this, too, has become more expensive to do. They are financing the share buybacks chiefly by new borrowing.
Drastic rises in interest rates for corporate lending have also made corporate investments more expensive. This could possibly create a restraint in new spending, which in turn could serve to put the brakes on the economy.
But those who still believe in Wall Street’s boom point to the fact that the price-to-profit ratio of 16-1 for the top 500 corporations is, in historical perspective, not exaggerated.
And, they are now hoping for an upturn in the American economy in the second half of 2007, and possibly, an interest rate cut by the Fed by the end of the year, or in early 2008. — Sapa-dpa