NEW YORK -- Stocks turned lower and credit markets remained strained Friday after the House approved a $700 billion financial rescue plan. While Wall Street was pleased by the bill's passage, investors confronted their worries about a prolonged economic downturn, and sold nervously ahead of the weekend.
Stocks continued their downward trajectory and slumped deeper into bear market territory Friday, despite the passage of a financial rescue bill by the House of Representatives.
Credit markets remained strained as Treasury bill demand remianed high, keeping the yield on the 3-month bill at around half a percent.
Stocks were up sharply earlier in the day, jumping as much as 3%, but began heading south as soon as the legislation passed. Despite passage of the $750 billion bill, which the government says is necessary to unclog frozen credit markets and stabilize markets, investors are still skeptical as to whether the plan will succeed in fixing what ails the economy.
At the end of trading, all the major U.S. stock indexes were trading at new bear market lows.
Jeffrey Hirsch, editor of the Stock Trader's Almanac, said investors are still uncertain as to whether the government's bailout plan will ease the crisis. The problems, he adds, are not likely to go away overnight simply with a signing of a bill, partly because the economy has already showed signs of stress from the ongoing credit crisis.
The Dow Jones industrial average closed down 157.47 points, or 1.5%, to 10,325.38. The Dow is now down 27.1% from its October 2007 high.
Broader stock indexes also sank deeper into bear territory. The Standard & Poor's 500 stock index, fell 15.05 points, or 1.4% to 1099.23. The benchmark index is now 29.8% off its high, and close to eclipsing the average 31.5% bear market drop since World War II.
The technology-dominated Nasdaq composite dropped 29.33 points, or 1.5%, to 1947.39. The Nasdaq is 31.9% off its 2007 high.
"This is not the end of the story," says Hirsch. "This is the beginning. I'm not convinced we have see the worst, or last of all this."
In recent days, data showing the economy growing increasingly weak, including a bigger-than-expected 159,000 jobs lost last month. That followed a sharp drop in factory orders Thursday.
"The actual effect on the economy has not fully registered in the markets," says Hirsch. "We still have to deal with the economic fallout and a likely recession."
Wall Street will now closely scrutinize how the plan is implemented and whether it is helping to thaw out frozen credit markets. The heart of the plan is designed to buy back toxic debt from banks so that they are freed up to start lending again. But that turn has not yet occurred.
The credit markets indicated increased demand for safety. The yield on the three-month Treasury bill, the safest type of investment, fell to 0.49% from 0.70% late Thursday. Yields have remained low in recent weeks because investors are eager to safeguard their money.
The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.61% from 3.64% late Thursday.
Wall Street's decline Friday capped an extraordinary week. On Monday, the Dow tumbled 778 points after the House voted down the financial rescue plan. Then stocks enjoyed a snapback rally Tuesday as investors grew more confident that Washington would assemble some kind of aid; the Dow jumped 485 points.
Stocks showed mostly modest moves Wednesday as investors waited for the Senate to take up the bill. Then a two-day pullback Thursday and Friday left stocks with huge losses for the week. The Dow lost 7.3%, the S&P 500 fell 10.8% and the Nasdaq declined 9.4%.
Outside the New York Stock Exchange, traders said the late pullback Friday reflected a pessimism of the past year that there was little underpinning most rallies and therefore it was prudent to lock in profits when possible.
Other traders agreed.
"You're probably seeing a little buy the rumor, sell the news mentality," said Ryan Larson, senior equity trader at Voyageur Asset Management, a subsidiary of RBC Dain Rauscher. Plus, he added, there's a feeling that this plan "isn't a quick fix."
"There are still a lot of problems out there," Larson said.
The bill's approval came as investors digested word that Wells Fargo agreed to buy Wachovia in a $15.1 billion deal. That cheered Wall Street because, unlike several recent banking tie-ups, it wasn't put together at the behest of regulators or using government money.
The agreement upends a plan announced Monday by Citigroup to acquire Wachovia's banking operations for $2.16 billion, a move orchestrated by the Federal Deposit Insurance Corp. However, Citigroup was demanding that Wachovia honor its agreement. The FDIC said it is standing behind the agreement it made with Citigroup.
Wachovia shareholders will receive 0.1991 share of Wells Fargo for every share of Wachovia they hold, valuing Wachovia at about $7 a share. The deal represents a nearly 80% premium to the stock's close of $3.91 on Thursday. The stock finished last week at $10, before the deal with Citigroup was announced.
Wachovia shares rose $2.30, or 58%, to $5.21, while Wells Fargo fell 60 cents, or 1.7%, to $34.56. Citigroup fell $4.15, or 18%, to $18.35, making it by far the steepest decliner among the 30 stocks that make up the Dow industrials.
Investors also appear relieved that the government's September employment report wasn't worse, although the Labor Department said payrolls shrank by 159,000, more than the 100,000 economists predicted. The nation's unemployment rate remained flat at 6.1%, as expected.
Investors also appeared pleased by a report that the nation's service sector was slightly stronger than expected last month. The Institute for Supply Management, a trade group of purchasing executives, said its service sector index slipped to 50.2 in September from 50.6 in August. However, the number came in ahead of the reading of 50 that economists had expected, according to Thomson/IFR. A reading above 50 signals growth, while a reading below 50 indicates contraction.
The dollar was mostly higher against other major currencies, while gold prices fell.
Light, sweet crude fell 9 cents to settle at $93.88 on the New York Mercantile Exchange.
Declining issues outnumbered advancers by about 2 to 1 on the New York Stock Exchange, where volume came to 1.42 billion shares.
Overseas, Japan's Nikkei stock average fell 1.94%. Britain's FTSE 100 rose 2.26%, Germany's DAX index rose 2.41%, and France's CAC-40 rose 2.96%.
Contributing: Associated Press