Stocks Rally on Early Reports of Agreement on Bailout Plan

Wall Street rallied yesterday when it seemed as if lawmakers had reached a fundamental agreement on a financial sector bailout and investors shrugged off new evidence of a struggling economy.

The Dow Jones industrial average gained 1.8 percent after House and Senate negotiators said that they had settled on basic principles of the $700 billion rescue plan. The news appeared to fulfill Wall Street's hopes that a bailout was forthcoming, said Tom Sowanick, chief investment officer at Clearbrook Financial.

"Things have become so dire that the stock market is up today because something has to get done. The stock market is betting on that proposal getting passed," he said.

However, the rescue plan's fate seemed less certain after the markets closed. Some congressional leaders voiced strong opposition to the bailout following a White House meeting with President Bush and top administration officials. The plan would allow the government to buy financial firms' bad debt.

Even if the deal holds, lawmakers still must hammer out the details, analysts said. The banking sector still needs to be recapitalized and the economy is still weak, said Joseph Brusuelas, chief economist at Merk Investments. "There are lingering concerns about the ad hoc nature of the deal, and the difficult truth that it's a half measure," because other sectors of the economy are still hurting, he said.

The Dow Jones industrial average, which climbed as many as 300 points, rose 196.89 to close at 11,022.06. The broader Standard & Poor's 500-stock index gained 23.31, or 2 percent, to 1209.18, and the Nasdaq composite index rose 30.89, or 1.4 percent, to 2186.57.

During the trading session, investors looked past three government reports highlighting the economy's weakness. Sales of previously owned homes fell 11.5 percent in August compared with the corresponding month last year, and median home prices fell 6 percent, to $221,900. The inventory of unsold homes -- one barometer of when the market might begin to turn around -- rose to nearly 11 months, more than double the median supply in 2006.

Weekly applications for unemployment benefits grew 32,000, to a seasonally adjusted annual rate of 493,000, partly because of hurricanes Gustav and Ike, according to the Labor Department.

"Based on our assessment, the labor sector is in recession and the economy, if it is not already there, is soon to follow," Brusuelas said.

Factory orders fell 4.5 percent in August, twice the expected rate. That includes a 6 percent decline in purchases of machinery and a more than 8 percent decline in purchases of autos and auto parts.

Meanwhile, General Electric cut its earnings guidance for the third quarter and full year, citing "unprecedented weakness and volatility in the financial services market." Despite the weaker forecast, GE shares were lifted by the broader market rally and closed at $25.68, up 4.4 percent.

"The market is not going up because of the economic news. The economic news is very dismal and points to the fact that the economy has weakened further," said Peter Cardillo, chief market economist with Avalon Partners. "But the market is obviously focusing on this rescue plan, which should get the economy back on track."

Movers

Chevron rose $2.24, to $87.47, as the oil giant's affiliate in Kazakhstan finished an expansion that will boost its production.

Pilgrim's Pride fell $2.52, to $3.84, as the chicken producer said it expects to report a "significant loss" in its fiscal fourth quarter.

Staff writer Howard Schneider contributed to this report.