The stock-market rally off its mid-July low was lubricated by falling oil prices, but its momentum has stalled now that oil's retreat has slowed. Aggressive government action may have turned the nation's "financial crisis into a crisis in the financials," according to Brown Brothers Harriman managing director Charles Blood. But continued mortgage losses and the uncertain fates of Fannie Mae (ticker: FNM) and Freddie Mac (FRE) remind investors how far the financial system is from rehabilitated.
Fannie shares, for example, tumbled 37% last week as a potential government bailout threatens the value of existing shares (See "Final Test for Fannie and Freddie"). Goldman Sachs cut estimates of big banks and brokerages and warned of intensifying mortgage-related losses in the third quarter -- a decline with no end yet in sight as mortgage rates remain above levels needed to revive the housing market.
Meanwhile, producer prices increased in July at the fastest annual pace in 27 years, and while this is a lagging indicator, and hopes run high that inflation will subside as oil pulls back, the differential between inflation felt by producers of goods and services and what they could pass on to consumers had reached 4.2 percentage points, its widest in more than three decades. "This is a serious cause for concern," notes Devina Mehra, chief strategist at First-Global Securities, since producers unable to pass on higher costs ultimately suffer compressed margins and weaker profits.
But if investors see little impetus to buy as the elusive economic recovery recedes further into the future, there is at least some comfort in stocks' marked-down prices and their relative value compared to overseas stock markets that have only just begun to grapple with slowing growth and still-tight monetary policies. For all their recent tumult, the U.S. stock indexes haven't fallen far below their January lows, as the increasingly drawn-out bottoming process eats up more of 2008.
Given the time it takes to repair household balance sheets and for prices of homes -- one of the slowest-moving assets -- to stabilize, the eventual U.S.