U.S. stocks cool, but rally continues overseas
NEW YORK -- Wall Street stocks turned lower Tuesday as investors examined the U.S. government's plans to spend $250 billion to buy stock in private banks and collected profits from the previous day's massive advance. The Dow Jones industrial average fell modestly points a day after its record 936-point jump.
Profit taking started creeping into the market after the Dow surged more than 400 points at the opening, and it was expected that some investors would take some money out of the market after such a massive gain. Moreover, it was anticipated that Wall Street would continue to see jittery trading in the weeks and perhaps months ahead because of worries about the weak economy.
"We don't know if the bottom is in," said Lincoln Anderson, chief investment officer and chief economist at LPL Financial in Boston, referring to the market's advance Monday after huge losses last week. "We certainly expect heightened volatility for a fair amount of time while we sort out just exactly what's going on."
Investors had snapped up stocks Monday in anticipation of the government's plan. President Bush said Tuesday the government will use a portion of the $700 billion bailout to inject capital into the nation's major banks, which have been slammed by souring mortgage investments. The move follows a similar one announced Monday by European governments to invest about $2 trillion in their own troubled banks.
Investors are hoping extraordinary steps by government officials will help resuscitate stagnant credit markets.
"The tone is cautious," Anderson said. "I don't think anybody is pile driving into the market and doubling up."
The revised bailout plan differs from the original in that it aims to recapitalize banks, not just buy the troubled assets off their books at prices that could leave the banks with losses.
"This begins to penetrate the core of the problem," said Peter Cardillo, chief market economist at New York-based brokerage house Avalon Partners Inc.
But, he said, "there will be a point in time where the euphoria of the bailout plan begins to wear off and the market begins to face reality. And that reality is likely to be a sour earnings season, and that the economy is in recession."
Though the major indexes showed losses, advancing issues outnumbered decliners by about 3 to 2 on the New York Stock Exchange, where volume came to 1.17 billion shares.
Light, sweet crude fell 47 cents to $80.72 on the New York Mercantile Exchange.
Following the Columbus Day holiday, the U.S. government bond markets reopened Tuesday and indicated that investors' desire for safe assets remains strong though overall demand appeared to ease. The three-month Treasury bill's yield rose to 0.32% from 0.21% late Friday, and the 10-year note's yield rose to 4.03% from 3.86%.
Banks appear to be growing somewhat more willing to lend to one another. The London interbank offered rate, or Libor, for three-month dollar loans fell to 4.64% from 4.75%. Libor is important because many consumer loans, including about half of all adjustable-rate mortgages, are tied to it.
The U.S. stock market has been rebounding from a gruesome week that obliterated about $2.4 trillion in shareholder wealth. The Dow came off an eight-day losing streak that amassed point losses of just under 2,400, or 22.1%, bringing the blue-chip index to its lowest level since April 2003. That 18.2% weekly plunge in the Dow was the worst in the index's 112-year history.
Stock rallies continued across Europe and Asia.
In Europe, Britain's FTSE 100 jumped 3.23%, Germany's DAX index rose 2.70%, and France's CAC-40 rose 2.75%.
The gains came after the Dow jumped 11.08% Monday and amid news that the U.S. Treasury would announce it is pumping $250 billion into American banks. The U.S. action is similar to how Britain's taxpayers took shares in three of their biggest banks on Monday in a bid to prop them up and encourage lending.
Tokyo's benchmark Nikkei 225 index shot up a staggering 1,171 points, or 14.2%, to 9,447.57 — reclaiming some of the ground lost in a 24% free-fall last week. The performance shattered the old record, a 13.2% rise on Oct. 2, 1990.
Elsewhere, stocks rallied a second straight day Tuesday, rising 3.4% in Hong Kong, 6.1% in South Korea, 4.1% in Singapore and 5% in Thailand.
Japanese markets had been closed Monday for a national holiday.
Global markets had been pounded last week by fears that governments weren't doing enough to control a financial contagion that began with the collapse of the U.S. housing market last year.
But investors have been reassured since the weekend by a series of aggressive efforts at damage control: On Monday, U.S. policymakers announced plans to invest $250 billion in U.S. banks, strengthening their capital cushion against losses from bad loans. Earlier, European countries had pledged $2 trillion to protect their own banks. Central banks around the world also have been cutting interest rates to thaw out a financial system frozen because bankers are too frightened to make loans to each other.
The salvage work continued Tuesday: Australia announced a $7.3 billion economic stimulus plan, pushing Australian stocks up 3.7%.
"A lot of the fear-driven panic that drove markets to losses in the past week is being placated," said Glenn Maguire, chief Asia economist at Societe Generale bank in Hong Kong. "An enormous amount of money has been thrown directly at the market or offered as a guarantee to deposits. We are getting close to the point where we can say policymakers have put a floor under the losses."
But Maguire warned that "it's a little bit premature to say the worst is over." The financial crisis has likely done damage to real economies around the globe, he said. After seeing their stock prices battered and their lines of credit cut off by panicked lenders, many corporations are likely to cut spending and jobs, denting economic growth and raising unemployment rates around the world.
Contributing: Paul Wiseman reported from Tokyo, Jeffrey Stinson reported from London, wire reports