Stocks closed mixed but recovered the bulk of the day's losses in the final hour of a wild trading session.
The markets were roiled all day as the Federal Reserve added $38 billion to the financial system to ease concerns that problems in the subprime mortgage market would spark a credit crisis. Though the moves appeared to calm the markets initially, some investors were spooked when the Fed entered the market for a third time in afternoon trading.
"I wonder why they did it three times instead of just one," said Charles Rotblut, senior market analyst at Zacks.com. "Are they seeing something no one else in the market is seeing or did they just underestimate demand?"
Rotblut added: "But there definitely is a positive reaction. People are relieved they are not being hawkish to inflation. This said, I don't think we're out of the woods yet."
Despite all the volatility, stocks ended with relatively minor changes on Friday and were actually up for the week. The Dow Jones Industrial Average posted a weekly gain of 0.4%, while the S&P 500 rose 1.4% and the Nasdaq Composite climbed 1.3%.
The Dow remains up 6.2% year to date while the Nasdaq is not far behind with a 2007 gain of 5.4%. The S&P 500 has lagged the other major indexes, clinging on to a year-to-date rise of 2.5%.
Analysts say investors should brace for more weeks like this one.
"You're going to have choppy couple of weeks here with death by paper cuts," said Jason Trennert, chief investment strategist at Strategas Research Partners. "Ultimately the system is strong, valuations are very reasonable and the ECB and Fed seem to be on top of their game … and are there to support the market if need be. Once the dust settles we think the Fed is going to ease and I think a lot of large cap stocks are on sale here."
Other market pros agreed that the recent selloff may have been overdone.
"Personally, I think its being overdone and every talking head is talking about the end of the world, but the reality is that it's not," said Patrick Fay, director of equity trading at DA Davidson.
"The fundamentals have gone out the window for awhile, and in some cases it means that better value has been created," Abby Joseph Cohen, chief U.S. portfolio strategist at Goldman Sachs, said on CNBC. "We think (the S&P 500) is about 10% underpriced and that typically has been a good entry point."
Analysts were divided on the significance of problems in the subprime mortgage market and its effect on global credit markets.
Martin Weiss, president of Weiss Research and editor of Moneyandmarkets.com, an investment advisory service, said mortgage market woes are not just a Wall Street phenomenon.
"It's a grassroots wildfire that is spreading in every region of the United States," he said. "Even if the Fed steps up its liquidity operations, American homeowners will still default on their mortgages and the value of the mortgage-backed securities are going to continue to decline,"
"That is what is causing the stock markets to fall and that's what is going to push the market down in the weeks ahead," Weiss added.
Treasury prices rose across the board, sending yields lower, as investors flocked to bonds in a flight-to-safety bid.
New York light sweet crude futures traded slightly higher amid the market uncertainty.
Import prices rose a higher-than-expected 1.5% in July, led by a large increase in petroleum prices. This was the sixth straight monthly increase in import prices. Export prices rose 0.2%.
European Stocks Lower
The fallout from the ongoing subprime-mortgage crisis continued to cut the value of European stocks Friday, following steep drops in both the U.S. and Asia.
But the selloff in Europe eased slightly after the European Central Bank confirmed it would add more liquidity to calm the euro money market after its $129.69 billion cash injection.
The ECB announced a tender for 3-day variable-rate securities with a minimum bid rate of 4%, which it called a "fine-tuning operation" following yesterday’s move.
Earlier, Asian central banks joined the European Central Bank and Federal Reserve in efforts to ease the current liquidity drought by pumping money into banking systems, or pledging to do so.
The London FTSE-100, Paris CAC-40 and Frankfurt DAX all closed firmly in the red.
Shares of ABN Amro nosedived in early trading, to settle at 5% lower, as investors feared Fortis bank would be unable to raise sufficient capital in current restrictive market conditions to pay for its share of the Dutch bank. Shares of Royal Bank of Scotland fell 3.7%, Santander was lower by 1.7%, Fortis was down by 2% and Barclays was off by 4.8%.
Britain's Old Mutual failed to provide any positive news in the battered banking sector when it reported a 12% fall in first-half operating profit and missed forecasts, blaming unfavorable currency markets. Shares of Old Mutual fell 2.6%.
Other earnings in focus include employment group Adecco, which posted a 64% rise in second-quarter net profit. Shares of the Swiss-listed company fell 2.7%.
And shares of ThyssenKrupp slumped 4.9% as the German industrial conglomerate raised its full-year sales and profit forecast slightly and beat expectations for the first three quarters.
Asian Stocks Slump
Asian stocks took a beating on Friday as investors dumped riskier assets following a rout in global markets which were sparked by a flare-up in credit jitters.
Major Asian central banks also moved to calm nerves by injecting additional funds into the money markets amid a rush to cash and other liquid assets.
This came as France's biggest listed bank, BNP Paribas, froze $2.2 billion worth of funds on Thursday due to the U.S. subprime mortgage.
Financial stocks bore the brunt of Friday's selloff with Japan's Mizuho Financial Group, Australia's Macquarie Bank and South Korea's Kookmin Bank all mired in red.
Tokyo's Nikkei 225 average was down in afternoon trading, while the KOSPI plunged 4%.
Other major markets in the region including Hong Kong's Hang Seng, Singapore's Straits Times Index and the Taiwan Weighted Index were all down nearly 3%.
The stock market rout also hit industrial metals and oil prices on Thursday, which in turn knocked down resource stocks such as global miners BHP Billiton and Rio Tinto. BHP fell 5%, while Rio shed 4%.
Japanese exporters including Canon were further hammered by a jump in the yen as investors shunned risky low interest rate-funded trades.
The Shanghai Composite Index weathered the stormy global markets relatively well, closing down just 0.1% since many mainland stocks have minimal exposure to the U.S. subprime market.