The fall was driven less by disappointing profits—though average earnings growth at American companies has fallen back into single digits this year—than by rising borrowing costs. Market interest rates have risen as investors become increasingly concerned about rising delinquencies in subprime mortgages and the effect of these on hedge funds and banks holding securities backed by such loans. These worries grew more acute this week when Countrywide, America’s largest mortgage lender, indicated that the subprime storm was starting to lash higher-quality mortgages. Few now expect to see signs of recovery in the housing market before the middle of next year, while a fast-growing number fear its troubles spilling into the broader economy. By Thursday afternoon, futures markets were pricing in a 100% chance of the Federal Reserve cutting short-term interest rates by December.

It is a repricing of risk that is at the heart of this latest move. Read it all.

Filed under: * Economics, Politics • Economy

1. DonGander wrote: Overpriced and underpriced stock is the stuff of short term speculators. They are always to be found as some are pretty much made-to-order by those with more equity than we. Who knows if the whole market can be similarly moved? I do know that it is a psycological game. Do not play the game unless you are resistant to both fear and ecstasy. In the long term; the economy is strong in spite of several potential fears and catastrophes. DonGander July 28, 5:04 pm | [comment link]

2. James Manley wrote: A drop of 400-odd points out of 14,000 is not much of a “fall.” July 28, 5:48 pm | [comment link]

3. Irenaeus wrote: “It is a repricing of risk that is at the heart of this latest move” And none too soon. _ _ _ _ _ _ _ _ “Who knows if the whole market can be similarly moved?” History suggests that it can. When lenders and investors have been lax about credit risk or overly optimistic about the trend of equity prices, seemingly small event can trigger a contagious reassessment of risk and return. July 28, 5:52 pm | [comment link]

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