NEW YORK (Reuters) - Every time over the last year that the U.S. government has stepped in to calm jittery markets Wall Street has scored big gains — but time and again the move higher has proven fleeting as the credit crunch has flared anew.
The market surged again on Monday, on the heels of the government’s takeover of home finance companies Fannie Mae and Freddie Mac, as it has after every rescue or bailout since July 2007,
As with the demise of investment bank Bear Stearns in March, the U.S. Treasury unveiled its rescue plan of the beleaguered home finance companies on a Sunday.
The move, according to analysts, suggested that Washington sought to instill confidence in the markets just as the week got under way.
But the big surge in stocks on Monday could be fleeting. Already on Monday, there were fears that the government’s interventions may be postponing what is likely ultimately to be further downside as news on the economy turns grimmer.
“If you look at the S&P 500 chart, every time it looked like we were going to test new lows, there was always something that stopped the downtrend. This is just prolonging the agony.” said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.
Saluzzi said the propensity for U.S. stocks to surge and then flag as the optimism stemming from every trickle of news about a government rescue bid fades showed just how uncertain investors have become about the market’s prospects.
A chart of the S&P 500 over the last year shows the peaks and the troughs that the broader U.S. stock market has endured since the credit crisis went on overdrive. But also apparent is the brevity of each upsurge associated with a government bid to ease the market’s strains.
On Aug 17, 2007, the U.S. Federal Reserve instituted an emergency cut of its discount rate, which subsequently drove the S&P 500 to a record close that October.
But as credit woes mounted, the U.S. stocks market resumed its descent, culminating in an inter-meeting 75 basis point cut in the federal fund rate on January 22, 2008, two days before France’s Societe Generale announced that it had suffered a major rogue trader scandal.
Then came March, when the Federal Reserve and the U.S. Treasury engineered the takeover of investment bank Bear Stearns by JPMorgan Chase. That rescue came a day before the market hit a new low on March 17, though the market rallied over the following weeks before falling again.
This past Friday, two days before the bailout of Fannie Mae and Freddie Mac, the S&P 500 came close to retesting its July low following a government report that showed the labor market had deteriorated further in August, with the unemployment rate at a near five-year high.
At best the rescue of the home finance companies has bought Wall Street some time. According to analysts, the action did not signify an all-clear.
“There was an initial euphoria. Now you have folks taking half a step back looking at the plan,” said Chip Hanlon, president of Delta Global Advisors in Huntington Beach, California. “This is just delaying the day of reckoning.”
Fannie Mae and Freddie Mac together back about half of the country’s $12 trillion in home mortgages. Their bailout could be among the government’s costliest ever.
“If you’ve got to continue to be saved, that tells you we’ve got major problems. If anything, today tells me there’s a lot worse out there than we really know,” said Saluzzi.
Editing by Leslie Adler