U.S. stocks are poised for more volatility and losses next week, with investors digesting the past week's turbulence, including further evidence suggesting that the U.S. economy is in recession and that the credit crisis shows no signs of abating.The past week saw an acceleration of the troubles in credit markets, where investors find it increasingly hard to assign value to debt instruments as a result of the bad loans that have surfaced on the balance sheets of financial institutions worldwide.
"We can be sure that this won't go away anytime soon," said Owen Fitzpatrick, head of the U.S. equity group at Deutsche Bank. "We'll see more news of banks having trouble raising capital and more news pointing to the fact that we're in a recession."
Stocks took another hit on Friday after news that the U.S. economy lost 63,000 jobs in February, the largest drop since March 2003 and marking the second drop in a row in monthly employment.
The Dow Jones Industrial Average (DJI:^DJI) lost 146 points, or 1.2%, to end at (DJI:^DJI) 11,893, capping a 2.8% weekly decline.
The S&P 500 Index fell 10.97 points to 1,293.37, down 2.8% on the week, while the Nasdaq Composite Index (COMP) shed 8.01 points to 2,212.49, off 2.6% on the week.
The Federal Reserve also intervened to boost liquidity ahead of the jobs report, somewhat cushioning its impact. Credit markets also had become increasingly volatile since earlier in the week, after a default at mortgage lender Thornburg Mortgage Inc. (NYSE:TMA) and a litany of other problems at other financial institutions.
Financials stocks ended Friday's session mixed with Citigroup Inc. (NYSE:C) off 1.3%, while J.P. Morgan Chase (NYSE:JPM) was up 0.5%, and American Express Co. (NYSE:AXP) 0.6% higher.
"Friday's market action is not going to satisfy anybody," said Ken Tower, chief market strategist at Covered Bridge Tactical. "The bulls did not get the recovery they'd hoped, and the bears did not get the collapse they wanted to get. There will be a lot of uncertainty and disgruntlement over the weekend."
Following the jobs report, market odds that the Federal Reserve will cut interest rates by 75 basis points in March jumped to 96%. The move would bring the central bank's key rate to 2.25%.
Investors next week will sift through more data that could point to economic weakness, though the first three trading sessions of the week will be relatively light on indicators.
On Thursday, February retail sales, weekly jobless claims, January business inventories and import prices for last month will be released.
Friday will bring a consumer-sentiment survey and the key consumer-price index for February, which will be watched closely for signs of inflation.
Commodities continued their rally over the past week. Crude futures touched a record high of $106.54 Friday.
The dollar dropped to a new low against the euro Friday, with the European currency hitting $1.5463. A weaker dollar makes dollar-denominated commodities, such as oil, less expensive for buyers holding other currencies.
Among key reasons cited by traders for the continued surge are that investors fleeing dollar-denominated assets are increasingly turning to commodities to seek a safe haven.
Other beneficiaries of market turmoil have been Treasury bonds, which typically serve as a safe haven.
Other beneficiaries of market turmoil have been Treasury bonds, which typically serve as a safe haven.
Some analysts believe that the current trends in U.S. markets will continue until the global economy also gets hit, which would force other central banks to also cut interest rates, putting pressure on their currencies.
But U.S. stocks could take an even turn for the worst once this happens, according to Joshua Rosner, analyst at Graham Fisher, as current dollar weakness has provided support in making dollar-denominated assets more attractive. "Once foreign central banks start to cut rates and the dollar strengthens relative to those foreign currencies, we are likely to see capital flight from our equity markets," he wrote in a note.
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