Stocks surged Wednesday as solid results in the technology arena and renewed demand for risky debt soothed investors a day after the Federal Reserve said the economy should keep expanding.
However, a late-day plunge and recovery revealed investors' underlying unease over how problems in lending might hurt corporate America, despite the Fed's assurances.
The Dow Jones industrial average initially soared more than 190 points, then dropped into negative territory in the last hour of trading, reportedly on speculation that investment bank Goldman Sachs Group would release some negative news. When Goldman Sachs dispelled the rumor, the Dow rebounded to finish up more than 150 points.
The sell-off illustrated how quickly sentiment can turn. The stock market has been ricocheting up and down in recent weeks on worries that borrowing will get tougher because of losses in the subprime mortgage market.
John O'Donoghue, co-head of equities at Cowen & Co., said he doubts that all the possible problems involving risky lending are resolved in investors' minds. "We'll have to see how the dust settles here in the next few days ... I don't think the market has made up its mind what it wants to do," he said.
On the whole, though, Wall Street was pleased to hear that computer network equipment maker Cisco Systems csco posted a 25% jump in quarterly profit and raised its revenue forecast for the year. The upbeat technology news, along with strong recoveries in the beleaguered financial and homebuilding sectors, came a day after the Federal Reserve suggested that the lending environment isn't difficult enough to trip up the economy.
The Fed's suggestion that it wasn't too worried about the credit markets appeared to reinvigorate them: Risky, high-yielding corporate bonds rose, while safe, low-yielding government bonds fell.
The Dow rose 153.56, or 1.1%, to 13,657.86.
The Standard & Poor's 500 index rose 20.78, or 1.4%, to 1497.49. The S&P has had its biggest three-day point gain since October 2002.
Both the technology-dominated Nasdaq composite index and the Russell 2000 index of smaller companies posted their largest one-day point gains since June 29, 2006.
The Nasdaq added 51.38, or 2.0%, to 2612.98.
The Russell 2000 index gained 21.53, or 2.8%, to 795.66. The index had dipped in late July into negative territory for the year, battered as credit crunch worries led investors to turn to larger, more established companies. Now, the Russell is back in positive terrain for the year.
"People are getting some appetite for risk again," said John C. Forelli, portfolio manager for Independence Investment in Boston.
President Bush on Wednesday tried to reassure Wall Street, expressing confidence that the stock market would eventually calm down, saying to a small group of reporters that "the underpinnings of our economy are strong."
Bonds plummeted as stocks rose, with the yield on the 10-year Treasury note spiking to 4.89% from 4.77% on Tuesday. Investors exited government securities after the Fed's statement dashed hopes of a rate cut, and on rumors that Asian governments would get rid of some of their U.S. assets.
The financial and homebuilding sectors — big losers in recent weeks — saw large gains Wednesday, with many investors seeing value in these pummeled stocks.