Bear Stearns bailout spooks investors, a reminder that credit crisis runs deep

Mar.15, 2008 in Market Outlook

NEW YORK (MarketWatch) — U.S. stocks next week will turn to the Federal Reserve, hoping it will deliver hefty cuts in interest rates after concerns about the possible collapse of investment firm Bear Stearns on Friday dashed investors’ hopes that the end of the credit crisis gripping global markets was in sight.

“After Bear Stearns, they’ll likely cut by more than was previously thought to show the market that they stand ready to provide as much liquidity as needed,” said Paul Nolte, director of investments at Hinsdale Associates.

Confidence in Fed
After the Bear Stearns news, market bets that the central bank will cut interest rates by 75 basis points next Tuesday jumped, pricing in a 100% chance of such as move, compared with 88% previously. The market also sees over 50% odds of an additional 25 basis points — which would bring short-term interest rates to 2% from the current 3%.

But some investors said that confidence in the central bank’s ability to turn the credit crisis around has begun to ebb in the market.

Friday’s action marked a dramatic turnaround for the market, which had surged on Tuesday when the Fed announced extraordinary measures to boost seized-up credit markets. The Dow rallied over 400 points, while the S&P and Nasdaq saw their biggest one-day gains in more than five years.

The big rebound had led some investors and analysts to observe that a bottom may be near in the market. On Thursday, those hopes were further boosted by a report from Standard & Poor’s, which said that the bulk of write-downs linked to bad home loans was probably behind for banks.

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