For the stock market, it was one day out of the frying pan -- and the next day into the fire. Again.
Share prices followed Tuesday's rebound with a steep plunge Wednesday, as fears about the financial system once more gripped Wall Street. A missile test by Iran didn't help the mood. The Dow Jones industrials lost more than 230 points.
The sell-off pulled the Standard & Poor's 500 index into bear-market territory for the first time since its 2000-02 dive. The broad market gauge, which sank 2.3%, joined many other indexes that had been dragged into the bear cave in recent weeks.
"It's a pretty ugly picture," said Brian Gendreau, investment strategist at ING Investment Management in New York. "It's very hard to point to a catalyst for getting back into" stocks.
The picture was especially ugly Wednesday for investors in mortgage giant Freddie Mac, whose shares plummeted $3.20, or 24%, to $10.26.
The market clearly wasn't swayed by the efforts of federal officials over the last two days to dispel concerns about the financial health of Freddie and its sister government-sponsored company, Fannie Mae, whose stock slid $2.31, or 13%, to $15.31.
The concern about Fannie and Freddie grew in reaction to a fresh sign that investors are becoming less willing to extend credit to the home-loan buyers despite the implied government guarantee of their debt: Fannie Mae issued $3 billion in two-year notes Wednesday at an annualized yield of 3.27%, far above the 2.39% that the U.S. Treasury pays on two-year notes.
In theory, if investors believed Fannie was truly creditworthy, it shouldn't have to pay that much more than the Treasury does.
And if there are doubts about Fannie and Freddie, that doesn't bode well for financial giants that aren't technically backed by the Treasury.
An index of financial stocks in the S&P 500 tumbled 5.2% Wednesday. Merrill Lynch sank $3.03, or 9.2%, to $29.74, its lowest since 2002. Bank of America slid $1.48, or 6.3%, to $22.06. Citigroup lost 95 cents, or 5.5%, to $16.44.
Wachovia fell $1.25, or 8%, to $14.29 after a Merrill Lynch analyst said it could record $18 billion in home-loan losses over four years. But the stock rebounded 2.9% to $14.70 in after-hours trading after the company named Treasury Undersecretary Robert K. Steel to be its chief executive.
