Assessments differ on stock market's course

WASHINGTON -- Little more than a week ago, Wall Street cheered as the Dow Jones industrial average hit a record high, just a hair above 14,000 -- up 1,000 points in three months.

Then on Thursday, stocks lurched into reverse. The Dow plunged more than 300 points as panicky investors worried that tightening credit might cripple the stock market and the economy. The Dow tumbled another 200 points Friday for a 4.2 percent loss for the week.

The drop left many investors wondering what changed all of a sudden and how they should react.

Some investors said they would sit tight and ride out the turmoil.

"It doesn't make me happy, but I know this is not going to be forever," Rochelle Zohn, 64, of Arlington, Va., said Friday. A retired teacher with savings in both stocks and bonds, she said her philosophy is, "You're in it for the long haul. If you can't stand a day's or a week's loss, then you should not be in the market because you can't react emotionally. You have to use your head."

The sell-off largely reflected a shift from nervousness to fear about the widening effects of the burst housing-market bubble, several analysts said.

Until Thursday, most of the pain from the housing downturn had been narrowly confined. Those suffering were home builders, mortgage lenders, and the banks and hedge funds that had bought and sold securities backed by home loans to so-called subprime borrowers with spotty credit. In other words, the same folks who had profited handsomely from the housing boom.

The stock market had climbed ever higher during the past year as consumers kept spending, and the economy chugged along, appearing to shrug off the housing market's woes.

But last week, a major mortgage lender reported rising payment problems among borrowers with good credit records. And investors started spurning bonds and loans sold by investment banks to finance corporate buyouts. Big banks had to postpone a $12 billion debt offering related to Chrysler's sale.

Sales and earnings reports showed that the housing slump was deepening -- and that stoked worries of a broader economic downturn.

"The risk of recession has certainly gone up this [past] week," said David Shulman, senior economist with the UCLA Anderson Forecast.

Other analysts were more upbeat. James Paulsen, chief investment strategist for Wells Capital Management, said the market's reaction "is more fear-based at this point than reality-based, for the most part."

He noted that the economy grew at a strong 3.4 percent annual rate in the April-through-June quarter, while business spending and export growth was solid, according to the Commerce Department's report Friday.

Even though interest rates for much corporate debt have risen in recent weeks, interest rates overall -- including those on most mortgages -- remain low by historical standards.

Some advisers urged caution. Several noted that the recent market volatility may be the pattern for a while. Hugh Moore, a partner at Guerite Advisors, said that as a defensive measure, he has most of his portfolio in cash.

But David Dietze, chief investment strategist at Point View Financial Services, was bargain-hunting for stocks on Friday afternoon, albeit carefully and selectively.

"I can't tell my clients for a fact that stocks won't be lower next week," he said, adding that he's "highly comfortable" that investors have overreacted by dumping financial services stocks.

Zohn said she would wait out this slump but more out of optimism than pessimism. She said of the stock market: "I know there will be some losses now, but I know it will come back."