VOL. 123 | NO. 201 | Tuesday, October 14, 2008
Wall Street Soars as Government Pledges Bank Aid
By TIM PARADIS | AP Business Writer
NEW YORK (AP) - Wall Street snapped back from last week's devastating losses after major governments announced further steps to support the global banking system, including plans by the U.S. Treasury to buy stocks of some banks. All the major indexes rose more than 8 percent, and the Dow Jones industrials rose more than 700 points.
The hope on Wall Street was that the market was finding a bottom after eight sessions of devastating losses that sent the Dow down nearly 2,400 points. But while a rebound had been expected at some point, investors can expect to see back-and-forth trading in the coming days and weeks as investors work through their concerns about the banking sector, the stagnant credit markets and the overall economy.
Despite the magnitude of the advance, Denis Amato, chief investment officer at Ancora Advisors, said it's too soon to say whether the market has started to carve out a bottom and that the credit markets where many companies turn for day-to-day loans will need to loosen for stocks to hold their gains. With the U.S. bond markets and banks closed Monday for Columbus Day, it was difficult for investors to gauge the reaction of the credit markets to actions by major governments.
He said the severity of the selling last week was one possible signal that the market might be nearing a bottom and that the stepped up intervention of the government is a welcome sign for the markets.
"I think we had enough negatives last week that if the government steps in we could have a pretty nice run. Is it off to the races? No, I don't think so. We have a lot of stuff to work through."
Bill Schultz, chief investment officer at McQueen, Ball & Associates in Bethlehem, Pa., said, "I would say this is closer to the bottom. I can't say this is the bottom."
"I think it's more relief, the rally today," he said.
Even as they return to Wall Street, investors remain worried about the health of consumers and areas like the housing sector.
But the market did appear to take heart when the Bush administration said it is moving quickly to implement its $700 billion rescue program, including consulting with law firms about the mechanics of buying ownership shares in a broad number of banks to help revive the stagnant credit markets and in turn get the economy moving again.
Neel Kashkari, the assistant Treasury secretary who is interim head of the program, said in a speech Monday officials were also developing guidelines to govern the purchase of soured mortgage-related assets. However, he gave few details about how the program will actually buy bad assets and bank stock.
A relatively tame finish to Friday's session and a weekend off gave analysts and investors some time to reassess last week's tumultuous trading. And stock prices that were decimated by frenetic selling are now looking attractive.
Jim King, chief investment officer at National Penn Investors Trust Co., said the fear that took hold of the markets last week was overwrought and could signal that a bottom is near. When selling turns so frenetic that it hits a broad swath of stocks indiscriminately, as it did last week, many market watchers say a market low is at hand. That creates opporunity, King noted.
"We have exceptional companies at fire sale prices," he said.
Still, King cautioned that any market rebound likely will be choppy.
"Even if this is the beginning of a recovery we're not just going to have up markets from here on in," he said. "We're not through the woods. We think there is collateral damage from this debacle." King pointed to an increase in unemployment and nervousness among consumers that could, for example, hurt retailers and in turn, take stocks lower.
In late afternoon trading, the Dow Jones industrial average rose 712.05, or 8.43 percent, to 9,163.24. It was the Dow's largest-ever point gain during a session, surpassing the jump of 503.45 points seen on Sept. 30.
The Dow's largest point increase by the time the closing bell sounded occurred March 16, 2000, during the waning days of the dot-com boom, when the blue chips closed up 499.19, or 4.93 percent.
Broader stock indicators also jumped Monday. The Standard & Poor's 500 index advanced 78.71, or 8.75 percent, to 977.93, and the Nasdaq composite index rose 146.86, or 8.90 percent, to 1,796.37.
About 2,900 stocks advanced on the New York Stock Exchange, while about 250 declined. But the trading volume of 1.22 billion shares was lighter than it had been last week, suggesting there was less conviction in the buying than during last week's selling.
Wall Street was cheered by word from the Bank of England that it would use up to $63 billion to help the three largest British banks strengthen their balance sheets.
The Bank of England, the European Central Bank and the Swiss National Bank also jointly announced plans to work together to provide as much short-term funding as necessary to help revive lending.
After a series of weekend meetings in Washington of heads of the Group of Seven nations, the gains in global markets signaled that investors found comfort from the actions and pledges coming from government officials.
The surge in stocks comes after a dismal week on Wall Street that erased an estimated $2.4 trillion in shareholder wealth. The Dow, after eight consecutive daily losses that totaled just under 2,400, or 22.1 percent, finished at its lowest level since April 2003, and also suffered its worst weekly percentage loss ever, a fall of 18.2 percent.
Meanwhile, the S&P 500 and the Nasdaq each lost 15.3 percent last week.
Recoveries from past crashes have taken considerable time. When the market crashed Oct. 19, 1987, sending the Dow down 508 points to 1,738.34, the blue chips had lost 938 points, or 36.1 percent, since reaching a then-record close of 2,722.42 on Aug. 25, 1987. It took just over 15 months for the Dow to get back to its pre-crash level, and almost two years to the day – Aug. 24, 1989 – to reach a new closing high, 2,734.64.
The Dow has an even larger percentage drop to regain this time. By Friday's close, the average had fallen 5,713 points, or 40.3 percent, from its record finish of 14,165.43 a year earlier, on Oct. 9, 2007. More recently, it has had fallen 2,970, or 26 percent, from its close before the Sept. 15 collapse of Lehman Brothers Holdings Inc., the event that triggered the freeze-up in the credit markets and that sent stocks plunging.
Investors have worried that banks' reluctance to lend to one another would imperil economic activity by making it harder and more expensive for businesses and consumers to get a loan. The mid-September bankruptcy of Lehman Brothers Holdings Inc. exposed major fault lines in the credit market as investors lost money on bad debt. That triggered a tightening of lending conditions.
"Everybody is basically waiting on the decision on where they're going to inject cash," Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams in New York, said of Bush administration officials. He said with the bond markets closed, U.S. government officials are likely holding off on announcement of details about where it might invest money until all major global markets are open.
Rovelli said that a sustainable advance on Wall Street could prove elusive.
"Everybody knew that we were going to have an up day eventually," he said, warning that the rally doesn't necessarily signal an end of the market's troubles.
Early Monday, Wall Street found some relief from Mitsubishi UFJ Financial Group's announcement that it closed on its $9 billion investment in Morgan Stanley a day earlier than expected. Morgan Stanley lost nearly 60 percent of its value last week as investors worried that the deal would fall apart. The agreement gives Morgan a much-needed injection of cash.
Morgan Stanley rose $8.12, or 84 percent, to $17.80.
The dollar was mixed against other major currencies, while gold prices fell.
Light, sweet crude rose $3.79 to $81.49 on the New York Mercantile Exchange after oil fell to its lowest level in 13 months last week.
The Russell 2000 index of smaller companies rose 33.86, or 6.48 percent, to 556.34.
Investors in Asia and Europe also grabbed stocks after last week's rout and the weekend moves by governments to bolster investor confidence.
In Asia, Hong Kong's Hang Seng index surged 10.2 percent. Markets in Japan were closed for a holiday. In Europe, Britain's FTSE 100 jumped 8.26 percent, Germany's DAX index rose 11.4 percent, and France's CAC-40 surged 11.2 percent.
On the Net:
New York Stock Exchange: http://www.nyse.com
Nasdaq Stock Market: http://www.nasdaq.com
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