NEW YORK (AP) — There will be no fresh start on Wall Street today when traders and investors get back to work. The market's anxiety over shrinking credit remains, and even if stocks manage gains after weeks of volatility, no one will trust that they will stick.
The immediate question is whether moves by the Federal Reserve to calm financial markets will succeed, and, if not, what the Fed will do next.
Wall Street is beside itself because of concerns over whether subprime mortgage-related losses are causing banks and other lenders to tighten credit and whether the market for mortgage-backed securities has dried up. The uncertainty is partly a result of the fact that no one really knows just how widespread mortgage problems are, and therefore how long it will take for credit market conditions to ease.
In the meantime, investors are uneasy because the scarcity of credit can stunt corporate growth, and, perhaps more important to Wall Street, curtail the mergers and acquisitions that helped feed a first-half stock rally.
Those concerns have taken stocks on a turbulent ride: Since the Dow Jones Industrial Average hit a record above 14,000 last month, it has swung up and down violently as investors try to gauge how tough the lending climate is becoming. Triple-digit moves in the Dow are becoming a daily occurrence.
The blue chip index is now 5.4 percent below its record, and stock market volatility, as measured by the Chicago Board Options Exchange's volatility index, is at its highest level since April 2003.
Another problem for Wall Street is that it doesn't seem to know what it wants from the Federal Reserve. After the central bank released its Tuesday statement that it was keeping rates on hold and still regarded inflation as its main concern, the market zigzagged.
Wall Street also wobbled and fell after the Fed, along with Europe's and Japan's central banks, made unusually large injections of cash into the banking system — moves that are intended to soothe the markets by creating more liquidity and in turn, giving lending a boost.
"Only time will tell if they've done enough. It is a step in the right direction," said Gary Thayer, chief economist at A.G. Edwards & Sons Inc. "They have the ability to calm the markets, but you know, they can't control traders' emotions directly. It ultimately rests on seeing events sort of stabilize, too."
What is especially disconcerting to investors, he added, is that it appears that mortgage market problems aren't just national, but global.
"The U.S. has been adjusting to the housing problems for years, and the Europeans are just waking up to the idea," Mr. Thayer said.
Yet another dilemma for the stock market is that investors don't know how robust they want the overall U.S. economy to be right now. Stronger-than-expected economic data support the argument that the United States shouldn't get a rate cut, which would free up more cash; weaker-than-expected data suggest that the sluggish housing market is tripping up the economy, which raises the prospect of a recession.
The delicate balance between stable interest rates and moderate growth that drove the Dow to record after record over the past year is in jeopardy. Now, the Fed may be caught between spurring the economy so much that it rekindles inflation, or not stepping in with enough conviction, allowing the credit markets to tighten.
A credit crunch could put the brakes on business deals around the world.
Most investors are confident that the Federal Reserve's diligence will eventually do its job, as it has in the past. The question, though, is where the stock market will be after it's done shaking out its worries.
"I don't think the central banks are going to try to support a particular stock market level," said Alan Gayle, senior investment strategist for Trusco Capital Management. "I think they want to make sure the credit markets and financial markets in general continue to operate and function."