Stocks finish lower as investors assess rate cut
NEW YORK -- U.S. stocks fell Wednesday as the government's effort to stave off a deep recession raised worries about mounting public debts and blunted optimism stemming from the Fed's rate cut.
A decline in stock prices was not surprising given that the Dow Jones industrial average rose more than 4% on Tuesday while other indexes gained more than 5% after the central bank lowered its federal funds rate target to a range of zero to 0.25% — the lowest levels on record.
At the close of trading, the Dow was down 99.80, or 1.12%, to 8,824.34. In the broad market, the Standard & Poor's 500 index fell 8.76, or 0.96%, to 904.42 and the Nasdaq composite index fell 10.58, or 0.67%, to 1,579.31.
The Fed's move was an unprecedented one aimed at boosting borrowing and lending. The central bank said Tuesday it anticipates the weak economy will keep the target rate low for "some time," and added that it is mulling the possibility of buying Treasuries — in effect, printing new money. On Wednesday, yields on Treasuries fell yet again to record lows.
"This is a whole lot of new information for people to digest," said David Waddell, senior investment strategist and chief executive of Waddell & Associates. "Now we need time to sit back ... and figure out what it all means."
Meanwhile, a larger-than-expected loss from Morgan Stanley offered fresh evidence of the sizable obstacles the battered financial industry still faces and kept investors on edge. The company posted a loss of $2.37 billion, or $2.34 per share, for the fiscal fourth quarter. The report came a day after rival Goldman Sachs Group posted its first quarterly loss since going public in 1999.
Despite the market's dip on Wednesday, investors have been rather resilient in recent trading sessions, leading some to believe that the market might be entering a period of stability after the unrelenting selling of the past three months.
"I think on balance, we're going to see the equity market trying through this difficult period to price in what things will look like in the second half of 2009," said Michael Strauss, chief economist at Commonfund.
Analysts were largely encouraged by the market's show of stability Wednesday.
"Even if the market is down 100 points, the fact that it's been in a narrow trading range I think is very positive," Waddell said.
In other news, Securities and Exchange Commission Chairman Christopher Cox blamed regulators for a decade-long failure to investigate Wall Street money manager Bernard Madoff, who is accused of running a $50 billion Ponzi scheme. Cox said staff attorneys never bothered to seek a formal commission-approved investigation that would have forced Madoff to surrender vital information under subpoena.
In response to the Fed's interest rate cut, most banks lowered their prime rate, or the rate they charge their best customers, to 3.25% from 4% — the lowest it's been in more than 50 years. The move is expected to lower rates on everything from home equity loans to credit card loans. Mortgage rates are also expected to fall after the Fed renewed its pledge to buy up billions of dollars of mortgage debt.
These moves could put billions of dollars into the pockets of consumers at a time when many Americans have lost the will to spend amid a worsening recession.
But many experts believe that the interest rate cuts alone won't be enough to spur spending.
"It's a tall order to get them to go out and spend again," said Joseph LaVorgna, chief U.S. economist at Deutsche Bank. "That's why you also need a stimulus."
President-elect Barack Obama's advisers are currently contemplating an economic recovery plan that could cost as much as $1 trillion over two years.
The dollar was mixed against other major currencies, while gold prices rose.
Bond prices extended sharp gains Wednesday. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 2.13% from 2.28% late Tuesday. The yield on the popular three-month T-bill — whose yield has at times gone negative due to frenzied buying — was at 0.01% down from 0.03% late Tuesday.
Oil prices retreated a bit from their earlier lows after OPEC said it will cut production by 2.2 million barrels a day — the largest ever at one time — to stem prices that have plunged more than 70% from highs near $150 this summer.
Light, sweet crude fell $3.54 to $40.06 a barrel on the New York Mercantile Exchange. Futures touched $39.88 a barrel ,
The recent decline in oil prices is helping to lower the U.S. current account trade deficit — the amount of money the country is borrowing from foreigners. The Commerce Department said Wednesday the current account trade deficit fell by 3.7% to $174.1 billion in the July-September quarter. That was a better showing than the $178.8 billion deficit economists expected.
Overseas, Japan's Nikkei stock average rose 0.52%, while Hong Kong's Hang Seng index rose 2.18%. Britain's FTSE 100 rose 0.35%, Germany's DAX index fell 0.46%, and France's CAC-40 fell 0.30%.