Wild Times on Wall Street

U.S. stocks stabilized Friday after plunging earlier on worries of a global financial crisis. The Fed rode to the rescue -- sort of

by Ben Steverman

Well, things could have been much worse. With early indications that U.S. equities were in for another pummeling Friday, stocks stabilized at the end of a volatile session to finish with only modest losses. Investors continue to worry that that the U.S. subprime loan problem might be turning into a full-fledged global financial panic.

The intervention of central banks to pump liquidity into world financial systems initially shocked markets. Then, at least in the U.S., the Fed's aggressive moves seemed to reassure investors. By Friday afternoon, Wall Street wasn't gripped by the sort of sell-first, ask questions later panic seen on Thursday, when the Dow Jones industrial average plunged 387 points.

On Friday, the Dow fell 31.14 points, or 0.23%, to 13,239.54. The broader S&P 500 edged up 0.55 points, or 0.04%, to 1,453.64. The tech-heavy Nasdaq composite index shed 11.6 points, or 0.45%, to 2,544.89.

Add up gains Monday through Wednesday, a horrible day on Thursday and Friday's middling results, and all three indexes were slightly above their close a week ago.

But what a wild ride it's been.

"Fear is here to stay" sang Elvis Costello, and a widely followed market gauge shows that investor anxiety remains high amid the equity gyrations. The CBOE volatility index, or VIX, a widely followed "fear gauge" on Wall Street surged to a 52-week high on Friday.

The volatility is knocking around individual stocks in extreme ways. John Thornton, portfolio manager at Stephens Small Cap Growth and Mid Cap Growth funds, says he's seen several small-cap stocks trading up or down 5% to 10% in one day for no apparent reason. "In these kinds of markets, the rumor mill gets churning pretty good," he says.

Among the biggest losers on the day were investment banking and brokerage stocks, with the S&P industry index down 1.2%. The group was hammered Thursday. The S&P Gold index climbed 1.33% as prices of the yellow metal recovered following Thursday's sell-off.

On Friday morning, the Fed issued a statement that said it "will provide reserves as necessary through open market operations to promote trading in the federal funds market at rates close to the Federal Open Market Committee's target rate of 5-1/4%." The central bank noted that "in current circumstances, depository institutions may experience unusual funding needs because of dislocations in money and credit markets."

Nervousness abounded among traders and market observers alike. Tobias Levkovich, Citigroup chief U.S. equity strategist, New York, said in a note Friday that the Street fears the potential for so-called "stat arb" hedge funds to need additional liquidity to meet redemption calls. "This is the biggest unknown in the markets at this juncture," writes Levkovich, especially given the leverage associated with some funds. The bottom line: "[W]e suspect equity market churn will continue."

Unfortunately, there is little on the economic calendar that seems likely to end the volatility by either confirming or refuting investors' fears definitively, Thornton says. He will be closely watching consumer spending for signs that housing, subprime and other credit problems are spilling over to the broader economy.

July retail sales data are out on Monday, while data on Tuesday and Wednesday, including the producer and consumer price indexes, could clarify the inflation picture. Preliminary consumer sentiment data from the University of Michigan is due on Friday.

Throughout the week, markets will closely watch the Fed for more moves to ease the credit crisis.

In total on Friday, the Fed injected $38 billion into the banking system, liquidity aimed exclusively at the credit market's Achilles' heel, mortgage-backed securities. The moves helped bring the Federal funds rate down from 6% in pre-market trading to the target of 5.25%.

The last time the Fed stepped in with that kind of liquidity was the week following the Sept. 11, 2001 terrorist attacks when it injected some $334 billion into the markets from Sept. 12 through Sept. 19.