Stocks’ wild ride should continue this week

updated 5:23 p.m. ET Nov. 16, 2008

NEW YORK - The stock market is trying to form a bottom, but the economic landscape keeps changing.

With the Treasury switching its financial bailout plans and Congress fighting over a potential rescue package for automakers, investors are having a tough time figuring out what the future will bring. And that will likely mean more wild swings in the market this week.

"These are tremendous dollops of uncertainty, one after the other," said Quincy Krosby, chief investment strategist for The Hartford. "A market needs confidence that things are going to get better. And right now there is a marked, marked lack of confidence that things are going to get better."

The result of this bewilderment is that every rally is subsequently met with selling. Last week's selloff wiped out about $800 billion in shareholder wealth, according to the Dow Jones Wilshire 5000 index, which reflects the value of nearly all U.S. stocks. The Dow Jones industrial average finished the week down 5 percent despite a 552-point surge on Thursday; the Standard & Poor's 500 index sank 6.2 percent, and the Nasdaq composite index plunged 7.9 percent.

To be sure, hedge fund and mutual fund selling has been contributing to the market volatility as funds respond to redemptions — calls from investors for their money back. Saturday was the deadline for redemptions at most hedge funds, but investors are not yet anticipating an end to large-scale fund selling.

But there are fundamental factors, too, behind the market's volatility, and a big one is the government's change in strategy over how to fix the weak economy and strained financial system. Without knowing what actions the government is going to take, investors cannot assess the severity of the economic downturn and price that into the market.

Last week, Treasury Secretary Henry Paulson said the $700 billion financial bailout money will no longer be used to buy troubled banks' toxic assets as originally planned and instead go toward buying stakes in the banks and other rescue efforts.

And over the weekend, after House Speaker Nancy Pelosi said the House would provide $25 billion in aid to General Motors Corp., Ford Motor Co. and Chrysler LLC, but top Republican senators said they opposed the plan. Congress will discuss the issue in a session this week.

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Wall Street's anxiety over the automakers is less about the companies themselves, Krosby said, and more about the hundreds of thousands of jobs tied to the U.S. automotive industry.

"This is about jobs now," she said. "Jobs are the symbol of the real economy."

Last week brought some troubling news about the job market: the Labor Department said initial jobless claims in the previous week jumped to a seasonally adjusted 516,000, nearly matching the 517,000 claims reported in the aftermath of the Sept. 11, 2001, terrorist attacks.

This week, economists predict a dip in initial jobless claims, but still a number in excess of 500,000. And continuing claims, already above their 2001 levels, are expected to edge higher again, according to economists surveyed by Thomson/IFR.

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