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By Tom Walker
Atlanta Journal-Constitution
Saturday, March 3rd, 2007
Wall Street finally got its correction this week, as the major stock market indexes fell more than 4 percent — almost 6 percent for the technology sector — in the worst weekly performance in four years.
The market appeared to stabilize after Tuesday's steep stock sell-off, when the Dow Jones industrial average fell 416 points, only to resume a steeper decline on Friday. The Dow fell 120 points for the day and ended the week with a loss of 4.2 percent. The Standard & Poor's 500 fell 4.4 percent this week, and the Nasdaq composite index lost 5.9 percent.
The Dow has fallen 5.3 percent from its Feb. 2 closing high, the S&P 500 is down almost 5 percent, and the Nasdaq composite is down 5.8 percent. That compares to a roughly 8 percent correction in May and June of last year, which launched the market's latest 20 percent advance.
Most mainstream strategists stuck by their positions this week that the latest correction was overdue at the end of an uninterrupted runup in prices, that economic and market fundamentals are unchanged, and that the bull market that began in October 2002 is not over.
"The bottom line is that it would be premature to conclude that a bear market has started," Tim Hayes, chief strategist at Ned Davis Research in Venice, Fla., said in a special analysis of the sell-off. "For now at least, we can continue to recommend maintaining a three-way [portfolio] allocation of 65 percent in stocks, 25 percent bonds and 10 percent cash."
At the same time, some investment advisers urge caution by investors in returning to the market.
Emily Sanders, chief executive of Sanders Financial Management in Atlanta, suggested that investors "hold off on putting cash to work until next week or two," since there may be further declines. At the same time, Sanders termed this week's sell-off as "overdue and necessary."
Friday's losses were blamed in part on the rally of the Japanese yen against the dollar in currency markets. The dollar fell 0.8 percent to a 2 1/2-month low. Analysts said hedge funds borrow in yen to fund trades they make elsewhere, and a rapidly rising yen is seen as a threat to this sector of the market.
Another factor was continued anxiety about the subprime mortgage market, whose problems threaten to expand into an already anxious U.S. housing market.
Freddie Mac, one of the biggest U.S. mortgage lenders, announced early this week that it is tightening its lending standards. And on Friday, the shares of New Century Financial, a major subprime lender, fell 7.6 percent when the company delayed filing of its earnings.
Several positive economic reports this week, including an upbeat manufacturing index, were credited with easing investor anxiety.
But next week's economic calendar is crowded with even more significant reports that could affect the market's direction.
Investors will have to absorb the latest data on nonmanufacturing industries, factory orders, labor productivity, labor cost, the balance of trade and, climaxing the week on Friday, February job growth and unemployment reports, all of which offer clues to the strength of the U.S. economy.
More important, perhaps, will be the Federal Reserve's policy meeting on March 21. Wall Street would like nothing better than a cut in short-term interest rates, which the Fed has left unchanged at 5.25 percent since June 2006.
Long-term rates, meanwhile, which move opposite to price, have fallen as investors abandoned stocks for the safe haven of Treasury bonds. The 10-year Treasury yield closed Friday at 4.51 percent, down from 4.63 percent on Monday. The yield has fallen 6.6 percent since a high of almost 4.9 percent on Jan. 29.
Foreign stocks were mixed on Friday. The Shanghai composite index, whose 9 percent fall on Tuesday triggered the global sell-off, rose 1.2 percent.
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