Stocks close ugly quarter as S&P 500 finishes down 9%

NEW YORK -- Wall Street, which was in free fall a day earlier, enjoyed a bungee-like rebound Tuesday, as investors bet the government would take needed steps to rescue the tottering financial system.

Stocks recouped more than half of Monday's historic 8.8% loss, easing some of the financial pain and panic after a $700 billion bill designed to unfreeze credit markets and boost investor confidence was voted down.

But the 5.3% rally by the Standard & Poor's 500 couldn't salvage an ugly third quarter in which the benchmark index finished down 9%. It's down 20.7% in 2008.

The past quarter was one of the most tumultuous in history, one that has forever changed the landscape on Wall Street. The deepening credit crisis shook the foundation of the financial system, forcing 158-year-old investment bank Lehman Bros. into bankruptcy, pushing the nation's biggest brokerage, Merrill Lynch, into an 11th-hour marriage with Bank of America, and prompting Wall Street's two remaining investment banks, Goldman Sachs and Morgan Stanley, to file for commercial bank status in an effort to ensure their survival.

Stocks suffered greatly from the sudden demise and decline of Wall Street's one-time powers. After Monday's manic plunge, the S&P 500 was down 29.3% from its October 2007 all-time high. That marks the index's sixth-worst bear market drop since World War II, S&P says.

Investor fear spiked to its highest level in six years Monday, but confidence improved Tuesday after the White House, Congress and market regulators signaled that they are willing to act to arrest the downward spiral in stock and credit markets. The Dow rallied 485 points to 10,851.

"I'm confident that the Wall Street rescue plan is not dead," notes Sam Stovall, S&P's chief investment strategist.

President Bush declared that a bailout was still needed and that "Congress must act." Members of Congress sought ways to tweak the legislation in ways that would increase the chances of passage. The Securities and Exchange Commission offered new guidance on valuing hard-to-price assets, noting that using fire sale prices is no longer always required. It's a key change that means banks won't have to value illiquid real estate assets at bargain-basement prices just because there are no buyers.

In another bid to boost confidence, lawmakers are considering raising the limit on federally insured bank deposits beyond the current $100,000 maximum.

Monday's plunge had all the elements of capitulation: spiking fear; investors seeking safety in short-term government debt; and virtually every stock falling. "The market on Monday had the dynamics of creating a bottom," says Pat Adams, portfolio manager at Choice funds.