Signs Are Pointing South on Wall St.; Credit Woes Foster Bets on Bad Times
Investors in stocks and bonds are paying prices that indicate they believe a snowballing housing crisis and worsening credit crunch will soon tip the U.S. economy into a recession, analysts said. Many economists, including leaders of the Federal Reserve, don't think things will get that bad, but some say the risk of a serious downturn has risen in recent weeks.</br></br>Investors were so eager to buy ultra-safe government bonds yesterday that they were willing to accept sharply lower interest rates. The rate on the 10-year Treasury bond fell to 3.84 percent from 4 percent Friday. The low rates indicate investors expect the Federal Reserve to cut interest rates aggressively in the coming year to ease the pain of recession.</br></br>Stocks are now down more than 10 percent from their peak in October. The Standard & Poor's 500-stock index fell 2.3 percent yesterday, dropping the market to a level that Wall Street analysts say reflects an expectation that corporate profits will fall.</br></br>Taken together, those and other data indicate that financial markets have a decidedly negative prognosis for the economy. "They're saying the odds of a recession are pretty damn high," said Diane Swonk, chief economist at Mesirow Financial.</br></br>There are reasons to think things will not get that bad, however. Holiday sales started Friday with a strong 8.3 percent gain over last year, and U.S. consumers have proven resilient in past periods of financial distress. With the dollar weakening, U.S. exporters will be at an advantage; joblessness remains near historic lows, at 4.7 percent; and the stock market, an old joke goes, has predicted nine of the past five recessions.