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Credit fears batter Wall St.

On the 20th anniversary of Wall Street’s worst one-day market crash, stocks tumbled as the confidence that produced record highs 10 days ago gave way to revived economic worries tied to housing troubles and a stubborn credit crunch.

The Dow Jones industrial average Friday sank almost 367 points, or 2.6 percent. Last week, many investors surmised that the worst of the fallout from the subprime mortgage debacle was over. But the Dow dropped every day this week as big banks posted billion-dollar mortgage-related losses, and top government officials warned about the risks that the depressed home market poses for the overall economy.

And oil prices appeared on some investors’ list of worries after briefly moving above the psychological barrier of $90 a barrel for the first time.

Several large U.S. companies offered downbeat comments Friday about their prospects, prompting investors to discard the notion that, despite signs of economic weakness, big American companies could stay healthy by continuing to sell their goods to emerging markets overseas.

Caterpillar Inc., an exporter of earthmovers and other heavy equipment, reported lower-than-expected earnings and cut its 2007 profit forecast. The manufacturer also talked of a recession in the U.S., with the company’s finance chief putting the odds of one in 2008 at “50-50.”

“The Caterpillar announcement calls into question the global growth story,” said Jack Ablin, chief investment officer of Harris Private Bank in Chicago. “It really sent shock waves to investors who viewed Caterpillar as an oasis in the storm.”

The Dow is down 4.5 percent from its Oct. 9 record high, putting it about where it was just before the Federal Reserve’s Sept. 18 interest-rate cut boosted hopes that a recession could be avoided. But the major stock indexes are still well above their low points set in August, when the credit crunch set off by mounting home-loan defaults was in full flower.

In fact, people who recently received statements showing their 401(k) balances up solidly this year through September are probably still in the black for the year – even after Friday’s decline, the Dow is up 8.5 percent in 2007.

And with the latest bad news comes hope of more help from the central bank. Based on trading in financial instruments linked to interest rates, Wall Street puts the odds of a Fed rate cut at the end of this month at 60 percent, up from 38 percent last week.

A prime factor in the stock market’s decline this week was renewed concerns about the global credit markets.

Three major U.S. banks said Monday that they would lead an $80 billion effort to prop up an esoteric class of funds that hold devalued mortgage-backed securities. But instead of reassuring investors, the plan triggered fresh worries about losses not yet reported and the overall toll the credit crunch could take.

Adding to the anxiety, former Fed Chairman Alan Greenspan said in an interview published Friday that the banks’ effort might backfire by further undermining confidence.

“It really was a wake-up call that maybe this is a lot more serious than a lot of people thought,” said Michael Metz, chief investment strategist at Oppenheimer Holdings in New York.

In Washington, finance officials from the world’s top economic powers pledged Friday to do all they can to limit damage to the global economy from a credit crisis.

“We remained committed to doing our part in sustaining strong global growth,” the finance officials said in a joint statement. While saying the functioning of global financial markets was improving somewhat, they warned that “uneven conditions are likely to persist for some time and will require close monitoring.”

The turmoil that financial markets have suffered in recent months dominated the Group of Seven discussions. Beside the United States, the other members of the G7 are Japan, Germany, France, Britain, Italy and Canada.

The finance officials didn’t specify acourse of action. Rather, they sought to strike a confident tone that they are on top of the situation. Finance officials also said they will seek to learn the causes and lessons from the turmoil.

Friday’s drop came 20 years after the stock market’s Black Monday crash in 1987, when the Dow fell a record 22.6 percent in a single day.

Some investment professionals see disquieting similarities between 1987 and today, including a weak dollar, surging commodity prices and a protracted bull market that could be wearing thin. The market also fell sharply on the Friday preceding the infamous Black Monday.

But many experts say there are significant differences between the two periods, calling the timing coincidental.

The markets, however, might be in for further volatility next week when a spate of housing-related data, including home sales, will be released, Ablin said. That could be partly offset if earnings reports expected from technology and pharmaceutical companies are upbeat, he said.

Friday’s sell-off was fueled in part by a growing feeling that corporate earnings, which have expanded at double-digit rates for much of the five-year bull market, might be weakening significantly.


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