Nervous Investors Send Dow Tumbling

The Dow continued to drop Friday, capping an ugly week for the stock market. Investors have become jittery over the prospect that tighter credit will slow the pace of mergers and cause consumers to curb spending.

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Wall Street can be a place of contradictions, and so it appeared again today. This morning, we learned that the U.S. economy had rebounded nicely during the second quarter this year growing at an annual rate of 3.4 percent. But in the stock market, the sell-off continued. The Dow Jones industrial average tumbled at another 208 points. For the week, the Dow lost 4.2 percent of its value. Stocks fill in worries among investors that the days of easy credit may be over.

NPR's Jim Zarroli reports.

JIM ZARROLI: At the White House today, President Bush lost no time crowing to reporters about this morning's growth numbers - the strongest the country has seen in a year.

President GEORGE W. BUSH: People are working, unemployment rate is down, wages are increasing. And so I want the American people to take a good look at this economy of ours.

ZARROLI: The president said one big reason the economy grew so much last quarter was that the United States exported more and imported less - the first time that's happen since 2003.

Pres. BUSH: In other words, U.S. farmers and small business owners and manufacturers have had found markets overseas for our products, products grown right here, built right here in the United States.

But on Wall Street, at least, the growth numbers were yesterday's news, and the focus was on the continuing drop in stock prices. The Dow finished the day down more than 200 points. It was the worst week since March. Economist Allan Sinai says stocks are falling because of the weak housing market.

Sinai says the fear right now is that too many people have lost too much money funding mortgages, and that they're going to grow scared about other kinds of investments, too.

Dr. ALLEN SINAI (Founder, Primark Decision Economics): There's fear that because of the credit that rests around the U.S. residential housing problem, that they'll cut back on the credit supply or funding of economic activity, and cause a recession. The markets are very worried about that.

ZARROLI: There's already been a big change of sentiment in one corner of the financial markets - junk bonds. Earlier this year, there were so much money sloshing around the junk bond world that even the riskiest companies could raise money by selling debt. But Martin Fridson, publisher of Leverage World, says that changed very quickly.

Mr. MARTIN FRIDSON (Publisher, Leverage World): It's very tough right now. All issuers are under a cloud. Even some fairly good credits have seen their existing paper trade down very severely.

ZARROLI: The junk bond market isn't really big enough to drag down the economy by itself, but Fridson notes that all this junk bond debt has help fund a lot of deals that have pushed stock prices higher and higher. And with a market drying up, stocks can only suffer.

At the brokerage company Miller Tabak on Manhattan's east side, this was another day of watching stock prices look for a bottom. Like a lot of people these days, the firm's chief technical strategist Phil Roth thinks this sell-off was almost inevitable. Roth says credit standards have just grown too loose; mortgages have been too easy to get. Roth is just surprised that investors are only now coming to grips with the problem.

Mr. PHIL ROTH (Chief Technical Strategist, Miller Tabak): It's fueled by easy credit. And easy credit breeds errors and mistakes, and there's always an accident or two when interest rates start to rise.

ZARROLI: And Roth thinks stocks are going to fall a lot more this year.

Mr. ROTH: Well, I think, we're overdue for a bear market. And average bear market is about 20 percent over six to nine months. So if you would have put a gun to my head right now and said how much is it going to go down over the next six months, I'll say, well, probably 20 percent.

ZARROLI: The worry right now is that all these losses will build on themselves leading to the kind of credit pullback that can provoke a recession. If that happens, the nice rebound in growth that took place last quarter will be just a memory.

Jim Zarroli, NPR News, New York.

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