Wall Street rebounded yesterday after the previous day's massive sell-off, as Federal Reserve chairman Ben Bernanke sought to calm markets about the prospects for the US economy.
Declaring that he still expects "moderate growth" in the US, Mr Bernanke told a Senate committee that there was no single cause for Tuesday's 416-point plunge in the Dow Jones industrial average. Despite the biggest sell-off on Wall Street in five years, which wiped out all the gains made since the start of 2007, Mr Bernanke told senators that the markets appear to be working well.
"There didn't seem to be any single trigger of the market correction we saw yesterday. I don't think it would be useful for me to try to parse the movement into the components associated with different pieces of news or pieces of information," he said.
After a tentative start, the market began to rally with some conviction as the Federal Reserve chairman said in testimony to Congress that there had been no material change in his outlook on the economy. By late afternoon, the S&P 500 index was 0.7 per cent higher at 1,408.48, slightly off its peak earlier in the morning. The Dow Jones Industrial Average was up 0.6 per cent at 12,285.70. The Nasdaq Composite rose 0.6 per cent to 2,421.18.
Although the Wall Street plunge on Tuesday followed a 9 per cent fall in China and sell-offs in European stock markets, analysts suggested that a number of specific factors were at work in the US.
They include disappointing macroeconomic data, jitters about the US housing market and the impact of former Federal Reserve chairman Alan Greenspan's suggestion this week that the US could be heading towards a recession.
The US economy grew at a pace of just 2.2 per cent in the final quarter of last year, much more slowly than the 3.5 per cent predicted, according to government figures published yesterday.
Sales of new homes plummeted by 16.6 per cent in January from the previous month, the largest decline since January 1994. The median sales price of a new home in the US fell to $239,800 in January, a 2.1 per cent decline from the same month last year.
Freddie Mac, one of the biggest providers of funding for US mortgages, said this week that it will stop buying such loans granted to "sub-prime" borrowers, that is, those with poor credit records. Recent months have seen a surge in defaults on sub-prime loans and investors fear that a wave of home repossessions could destabilise the housing market.
In a conference call from Hong Kong on Monday, Mr Greenspan said that, although the global environment was "benign", a US recession was possible.
"When you get this far from a recession, invariably forces build up for the next recession, and indeed we are beginning to see that sign. For example, in the US, profit margins . . . have begun to stabilise, which is an early sign that we are in the later stages of a cycle," he said.
Mr Bernanke yesterday appeared to contradict his predecessor, telling senators that recent events had not shaken the Fed's confidence that the US economy is sound. "My view is that taking all the new data into account, that there is really no material change in our expectations for the US economy since I last reported to Congress a couple of weeks ago," he said.
