NEW YORK -- Don't look for a quick fix to Wall Street's problems.
The government's inability to quickly finalize its bank bailout plan and an unexpected surge in oil prices did little to soothe the frayed nerves of investors Monday, prompting a 3.3% Wall Street sell-off that wiped out all of Friday's manic gains.
It took just took one trading session for the initial optimism surrounding the government's proposed $700 billion plan to rid banks of toxic real estate assets to fade. Unlike late last week, when the mere rumor of a major intervention from Capitol Hill ignited a two-day, 779-point rally in the Dow Jones industrials and raised hopes that market turbulence would give way to stability and renewed confidence, investors on Monday opted to focus on the unknowns and bearish unintended consequences of the costly plan.
Analysts say the massive government borrowing needed to unclog credit markets was partly behind the record $16.37 jump in a barrel of oil. It was also a factor in the renewed weakness in the U.S. dollar. Both were viewed negatively, as pricey oil depresses consumer spending, and a weak dollar stokes inflation.
"This is the worst possible scenario that (Treasury Secretary Henry) Paulson wanted to see," says Gary Kaltbaum, president of Kaltbaum and Associates.
The Dow Jones industrial average plunged 373 points, or 3.3%, to 11,016, and is 22.2% off its high. The massive moves up and down are unprecedented. For the first time ever, the Dow has had closing point moves greater than 350 points in four sessions in a row.
The proposed bailout is also supposed to thaw frozen credit markets. Monday, there were some signs of progress but also signs of stress. A 10-year Merrill Lynch corporate bond was trading nearly 4 percentage points above a comparable U.S. Treasury bond, vs. a nearly 6-point gap in last Wednesday's panic. But there was a dearth of bonds issued, a sign that credit markets are still frozen, says Marilyn Cohen, president of Envision Capital Management.
The good news is that "yield spreads are narrowing and moving in the right direction," says Wan-Chong Kung, a senior portfolio manager at First American Funds.
Uncertainty continues, adds trader Todd Leone at Cowen & Co.: "People are not sure what will happen. No one is jumping into stocks."