Credit and economic fears weigh on Wall St

Wall Street stocks were mixed on Friday as a modest rebound in the technology sector was overshadowed by heightened fears of corporate and commercial property credit defaults.

A lacklustre session capped another bad week for equities which were beset by fears that the US economy is heading into recession.

Fearing a sharp downturn, investors shifted into perceived safe havens, such as consumer staples and utilities, and off-loaded financial companies amid rumours of a fire-sale of credit derivatives.

The S&P 500 closed 0.4 per cent lower at 1,331.29 on Friday, marking a decline of 4.6 per cent for the week. The S&P closed lower in four of five trading sessions and almost wiped out a rebound of 4.9 per cent the previous week.

The Dow Jones Industrial Average shed 4.4 per cent to 12,182.13 over the week. The tech-heavy Nasdaq Composite rallied on Friday but still ended the week down 4.5 per cent at 2,304.85.

Equity investors were left pondering whether stocks are now set to retest January's lows or if equities were over-sold and are primed for a recovery.

"Part of making a [market] bottom is time. Even if the market doesn't make a new low it's going to go sideways for a while," said Jim Moffett, lead portfolio manager at UMB Scout Fund International.

A spike in wholesale inventories provided further evidence on Friday of a slowing US economy. It followed a dire reading on the ISM non-manufacturing index, which sent stocks into their steepest declines in almost a year on Tuesday.

Many analysts believe stocks have become cheap relative to earnings and say recession fears have already been priced in. However, the cost of insuring corporate debt soared this week, suggesting equities may be understating risks.

"The battle is on a number of fronts right now, it's not just in the real economy, it's in the credit markets that are showing increasing signs of strain," said Quincy Krosby, chief investment strategist at The Hartford.

One of the main factors weighing on the market remains the uncertain fate of monoline insurers. Investors fear a downgrade of a key bond insurer could trigger big losses at US banks.

Moody's Investors Service cut bond insurer Security Capital Assurance's AAA rating this week and MBIA (NYSE:MBI), a larger bond insurer, offered $1bn in new stock to raise much-needed capital. Its shares fell 10.8 per cent to $14.60 for the week.

Financial stocks were among the worst performing this week with Citigroup (NYSE:C) falling 12.3 per cent to $26.03, while Morgan Stanley (AMEX:MWD) gave up 10.5 per cent to $43.19 as writedown fears persisted. Credit card companies including American Express (NYSE:AXP), down 9.3 per cent at $44.98, were also hit after an analyst warned delinquencies would worsen well into 2009.

The S&P homebuilder index fell 14.9 per cent over the period and the Bloom-berg real estate investment trust index declined 7.4 per cent amid signs the commercial real estate market has become the latest victim of the credit squeeze.

Investors were also downbeat about earnings prospects, particularly in the technology sector.

The Nasdaq saw the best of Friday's gains after Amazon.co (NASDAQ:AMZN)m announced a $1bn share buy-back programme and McAfee (NYSE:MFE), the antivirus software company, beat estimates with its quarterly results. Nonetheless, the two companies shed 1.5 per cent to $73.50 and 1.1 per cent to $34.65 respectively this week.

Cognizant Technology Solutions (NASDAQ:CTSH), a tech outsourcing company, rose 6.7 per cent to $31.84 over the period after it issued a first-quarterly profit forecast that exceeded expectations.

Tech shares have fallen sharply this year on concerns a looming economic slowdown will cause companies and consumers to cut back on spending. Cisco (NASDAQ:CSCO)'s weak third-quarter sales outlook this week encouraged traders to keep selling large-cap tech stocks and although many of these pared losses on Friday, Cisco ended the week 5.6 per cent lower at $23.54 while Apple declined 6.2 per cent to $125.48.

In retail, Wal-Mart (NYSE:WMT)'s till receipts were disappointing, leaving its stock down 4.7 per cent at $48.76 for the week. Some high-street names recovered ground after JC Penney, down 1.8 per cent at $47.63, gave reassuring earning guidance.

Exchange operators were among the worst hit stocks after the Department of Justice called for clearing houses to be broken off from futures exchanges. Although the sector rebounded after an analyst called the selling overdone, CME Groupstill fell 15.3 per cent to $517 this week.