Markets are Bouncing and Financial Turmoil Brings Comparison to 2008 Crisis

Markets were set to rise on Thursday, bouncing after a sharp fall in the previous session, and boosted by forecast-beating results from Cisco (CSCO.O).

Many Americans are wondering whether they are in for a repeat of the financial crisis of 2008. Photo: Benjamin Dumas/Flickr.

Markets were unlikely to regain all the ground lost on Wednesday, with investors still worrying about debt levels and weak growth rates on both sides of the Atlantic.

At 5:21 p.m. EDT, futures for the S&P 500, Dow Jones and Nasdaq 100 were up 1.2-1.6 percent. The Dow Jones industrial average .DJI lost 4.6 percent; the S&P 500 .SPX fell 4.4 percent; the Nasdaq Composite .IXIC dropped 4.1 percent.

The FTSEurofirst 300 .FTEU3 index of leading European shares was up 1.3 percent at 921.24 points. Weekly U.S. initial jobless claims were expected to stay steady at 400,000, the same as the week before, according to a Reuters survey.

Sara Lee (SLE.N), the maker of Hillshire Farm lunch meat and Senseo coffee, will likely give investors an update on its planned separation when it reports quarterly earnings.

Others reporting include Wendy’s hamburger chain owner Brinker International (EAT.N) and department stores Nordstrom (JWN.N) and Kohls (KSS.N).

Italian and Spanish stocks gained, as the European Central Bank was seen buying Italian and Spanish government bonds again, easing jitters over the two countries’ ability to deal with their debt problems.

Anheuser-Busch InBev (ABI.BR), the world’s largest brewer, warned of challenging times in its biggest market, the United States, after beer prices rises there and in Brazil helped it meet second-quarter profit forecasts.

With consumer spending already declining in recent months, economists say the plunge in the stock markets over the past month could deal another significant blow to Americans’ spending habits — a threat that could imperil any meaningful economic recovery.

Economists often say the so-called wealth effect — where the perception of success or failure in the equity and real estate markets causes consumers to spend more or cut back – can affect the broader economy.

The housing crisis has already eaten into household wealth over the past four years, wiping out more than $11 trillion in wealth in 2008 alone, helping to deliver the first outright decline in consumer spending in a generation and bringing on the Great Recession.

“Most people aren’t interested in finance on a day-to-day basis, but all of a sudden they become quite fixated on financial issues when they see either large losses or large gains in their portfolios,” said Andrew Lo, a finance professor at MIT’s Sloan School of Management.

“That kind of perception of a loss in wealth is going to make people more frugal, more reluctant to spend — and that’s exactly the wrong direction for the economy to go.”

Consumer spending roughly contributes to 70 percent of gross domestic product; therefore economists pay close attention to consumer confidence as a barometer of economic recovery.

Many Americans are wondering whether they are in for a repeat of the financial crisis of 2008. The answer is a matter of fierce debate among economists and market experts. Many say the risks are lower today — at least in terms of an immediate crisis — because the financial system over all is healthier and there are fewer hidden problems.

But the experts add that there are reasons to worry, and they do not rule out a quick downward spiral if politicians in the United States and in Europe cannot calm investors by addressing fundamental financial threats.

“So far it’s not as bad as 2008, but it could get much worse because the sovereign debt concerns are much more global than the subprime mortgage risk of 2008,” said Darrell Duffie, a professor of finance at Stanford and an expert on the banking system.

Most of the attention so far has been focused on volatility in stocks, with investors spooked by three heart-stopping declines in the last five trading days — including Wednesday’s 4.6 percent drop in the Dow Jones industrial average.

A growing lack of confidence is perhaps the most troubling similarity to 2008 and the biggest worry. “There’s a level of fear out there that is a little similar,” said Michael Hanson, a senior economist with Bank of America Merrill Lynch. “It’s not just the fundamentals. It’s the fear of the unknown.”

But the bigger concern of many financiers and government officials was signs of stress on Wednesday in European credit markets, which are essential to financing the day-to-day operations of banks and companies there. [via Reuters, The New York Times and Huffpost]

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