Stocks rally to close higher in volatile trading
— -- Stocks ended another tumultuous day with a big gain Tuesday, partly recovering from its worst sell-off in years after the Federal Reserve said it was keeping interest rates steady.
Trading was volatile as investors try to determine just how precarious the nation's financial situation is. The Fed tried to sooth fears of a worsening financial crisis even as the market waited to learn the fate of troubled insurer American International Group.
The Fed signaled that while there are growing strains in the financial markets, it expects its earlier rate cuts and efforts to boost liquidity in the banking sector to help the economy.
Worries about the future of AIG weighed on the market, pushing stocks lower in early trading. But positives such as plummeting oil prices served as an offset and helped the market recover from its lows.
A day after its worst loss in more than six years, the Dow Jones industrial average rose 141.51, or 1.3%, to 11,059.02 despite a $1.01, or 21%, decline of AIG to $3.75.
The Standard & Poor's 500 index rose 20.90, or 1.8%, to 1,213.60, and the Nasdaq composite index rose 27.99, or 1.3%, to 2,207.90.
Investors are almost paralyzed by the constantly shifting environment rife with uncertainty, says Michael Farr of Farr Miller & Washington. "Wall Street is hit with such a storm of unexpected information it's difficult to process the ramifications more or less figure out how to react," he says.
Wall Street continues to get pummeled with new information pertaining to:
•AIG. Rampant speculation gripped trading on the stock as traders tried to assess how much the insurer needs to remain solvent or whether or not the government will step in to shore up its finances. "Now we're looking at AIG trying to figure out what happens if AIG fails," Farr says.
•Oil prices. The price of a barrel of crude continued its precipitous decline, falling $4.56 to $91.15. Oil prices continue to fall as the worldwide economy cools and cuts demand for energy and commodities. Jim Paulsen at Wells Capital Management says plunging oil prices is a bright spot and could be more of a direct benefit than the failure of Lehman is a negative.
•Health of the remaining investment banks. Investors are nervously scanning the financial system looking for any other weak links. Goldman Sachs, the largest remaining U.S. independent investment bank reported 70% lower quarterly net earnings of $845 million or $1.81 a share. While the earnings results topped expectations, the company indicated just how difficult the environment is. "This was a challenging quarter as we saw a marked decrease in client activity and declining asset valuation," CEO Lloyd Blankfein said a statement. And the shares suffered, falling $2.49 to $133.01.
•Moves by the Federal Reserve. Some investors were somewhat surprised the Fed decided to leave short-term interest rates untouched at 2% in light of the turmoil in financial markets. In its statement, though, the Fed highlights its aware of problems with employment and inflation. Alan Skrainka of Edward Jones says the Fed made the right move. "Short-term rates being too high is not the problem," he says. "The problem is confidence and liquidity."
Meanwhile, the market continue to remian volatile. The Dow fell below the 11,000 level and the S&P beneath 1200 on Monday, which were levels traders hoped would hold as low-water marks. "You're starting to get to levels below long-term trends that have only been seen in very deep bear markets and tough economic times," says Rod Smyth of Riverfront Investment Group.
While more downside is certainly possible, given the extent of AIG's problems and reach, Smyth says the time to panic is past. "I'm a buyer (of stocks) not a seller," he says.
Contributing: Associated Press