Major U.S. stock indexes ended a turbulent week lower on Friday as the optimism over a wave of positive earnings reports and talk of a takeover of troubled bond insurer Ambac Financial (ABK) gave way to renewed concerns about the financial sector.
On Friday, the Dow Jones industrial average finished down 171.44 points, or 1.38%, at 12,207.17. The broader S&P 500 index fell 21.46 points, or 1.59% to 1,330.61. The tech-heavy Nasdaq composite index slid 34.72 points, or 1.47%, to 2,326.20.
Trading in the equity markets will probably continue to be volatile, as most of the problems in the credit markets persist, says Bruce McCain, head of investment strategy at Key Private Bank in Cleveland, Ohio.
"We may have put a low in place just because sentiment was so bad, but it will take a while before any [fiscal or monetary stimulus] measures that have been taken start to help, and it will take a while for markets to stabilize and free up a bit," he said.
Higher sensitivity to moves in overseas stock markets reflects a growing awareness that other economies are slowing down and won't be there to carry the U.S. economy through this period of weakness as had been hoped, McCain said.
In Europe, banking shares came back under pressure late in their session Friday amid speculation about fresh profit warnings for Dutch banking and insurance groups such as ING Groep NV (ING) and Fortis in Belgium, Action Economics said. Fortis has since said it's not aware of anything that could explain the drop in its shares, but traders are selling first and asking questions later after their experience with Societe Generale, Action Economics said.
Earlier in the day, Microsoft's near doubling of its second-quarter earnings to 50 cents per share on a 15% rise in revenue (excluding year-ago deferrals) kickstarted the markets and lent support to the technology sector overall, but pre-weekend caution among investors made those gains short-lived.
Billionaire vulture fund operator Wilbur Ross is in takeover talks with Ambac, whose recent financial crisis was a major factor in the Fed's dramatic intermeeting interest rate cut on Tuesday, according to the Evening Standard. Standard & Poor's said it's not surprised a third party has entered the fray and upheld its hold rating on the stock. Ambac shares were trading 5.5% higher. Some analysts are skeptical that Ross, who favors already-bankrupted companies, is seriously considering buying Ambac, especially after its impressive comeback this week from all-time lows last week.
All was quiet on the economic data front on Friday, but the markets will have a smorgasbord of reports to sink their teeth into next week, starting with December new home sales on Monday, followed by December durable goods orders and January consumer confidence on Tuesday and preliminary fourth-quarter GDP on Wednesday.
Those numbers will likely influence what comes out of the Federal Reserve's policy committee meeting on Wedneday and Thursday. The Fed funds futures are pricing in another 50-basis-point cut in interest rates, but the Fed could decide that their emergency 75-point cut on Jan. 22 was enough, especially as more comes to light about Societe Generale's trades.
At the end of next week, nonfarm payrolls for January will either confirm recent declines in initial jobless claims or show there's still cause for concern in the labor markets.
If the unemployment rate can hold at or below 5.5%, the likelihood of a recession is small, said Max Bublitz, chief strategist at SCM Advisors in San Francisco. Unemployment ticked up to 5.0% in December from 4.7% in November.
Consumer confidence is deteriorating rapidly as people watch the value of their real estate and stock assets decline, he said. Workers may keep their jobs but without meanningful hikes in wages, it will be hard for them to keep up their spending, he added.