By Renae Merle
Washington Post Staff Writer
Wednesday, October 1, 2008
After a historic sell-off Monday, investors appeared wary but hopeful yesterday that lawmakers will eventually agree to a bailout package for the financial sector, sending stocks surging.
The Dow Jones industrial average gained 485.21, or 4.7 percent, to close at 10,850.66 and restore most of Monday's record 778-point loss. The broader Standard & Poor's 500-stock index and technology-heavy Nasdaq composite index also closed up about 5 percent. The S&P 500 gained 58.35, to 1164.74, and the Nasdaq rose 98.60, to 2082.33. Both indexes lost about 9 percent Monday.
On any other day, the rebound would be considered a massive rally, but it was still not enough to offset Monday's slide, which wiped out $1.2 trillion in paper wealth.
The House voted down the bailout package Monday, sending stocks careening, and is not expected to take it up again until after Rosh Hashanah, which ends at sunset today. That has left many investors in limbo.
The rates banks charge to lend to each other jumped yesterday. A key rate for overnight loans spiked more than four percentage points, to 6.9 percent, its highest level ever.
"I won't be confident in the stock market until we see some sustained improvement in the credit markets," said Michael T. Darda, chief economist at the trading and research firm MKM Partners. "Until they turn, I would be very wary about embracing any stock market rally."
Investors have regained confidence that the legislation will eventually pass, which unleashed bargain hunters yesterday, analysts said.
"A lot of it's related to the idea that a majority of people expect that we will get a rescue package bill, in a belated form, in the coming week," said Alan Ruskin, chief international strategist at RBS Greenwich Capital.
Aiming to inject more confidence into the banking sector, the Federal Deposit Insurance Corporation also announced late yesterday it will ask Congress to temporarily lift its $100,000 cap on insured deposits. The news helped boost stocks, including some financial firms, during the last hour of trading. National City closed up 29 percent, while Goldman Sachs gained 6 percent. After replacing its chief executive yesterday, Sovereign Bancorp surged 108 percent before closing with a 70 percent gain.
After falling $10 a barrel on Monday, light, sweet crude oil rose $4.27 yesterday to settle at $100.64 a barrel. Gold, often a safe haven during a turbulent market, fell $14 an ounce, or 1.6 percent, settling at $874.20.
"The market has sent a message to Congress that [Monday] is just the beginning if something isn't done," said Peter Cardillo, chief market economist with Avalon Partners. "I don't think it's going to take much longer. I think Congress has gotten the message."
The expectation that the bailout would eventually pass also helped strengthen the dollar, which was up more than 2 percent against the euro yesterday -- its largest ever such increase -- and nearly 2 percent against the yen. Demand for the dollar is also up because banks are hoarding their cash, an analyst said. Meanwhile, the euro has been hit by the recent troubles in its financial sector.
"Europe is still engaged in damage control" related to its faltering banking sector, said Marc Chandler, global head of currency strategy at Brown Brothers Harriman. "The U.S. is moving towards a solution, even if democracy is messier. We are ahead of the game in addressing" the market's problems.
Yesterday was the final day of trading for the third quarter. Since the end of June, the S&P 500 has fallen 8.8 percent, its fourth straight quarterly decline. Meanwhile, the drumbeat of negative economic news continued.
The housing market, which spurred many of the economy's current problems, continues to be weak, according to the Standard & Poor's/Case-Shiller home-price index released yesterday. Home prices in July fell at a record rate, according to the data. In 20 major housing markets, prices fell 16.3 percent in July compared with a year ago and 0.9 percent compared with June.
In the Washington area, prices fell 15.8 percent in July compared with last year. The most challenging markets continue to see drastic declines: Prices fell 30 percent year over year in Las Vegas and 29 percent in Phoenix.
"House prices are still tumbling downhill, but the hill's slope is leveling," Patrick Newport, U.S. economist for Global Insight, said in a research report.
But U.S. consumer confidence grew this month, according to the Conference Board. The survey includes data collected until Sept. 23, so it probably was bolstered by falling gas prices while not fully reflecting the financial crisis that has unfolded in the past two weeks, analysts said. Consumers are still cutting back on spending and face higher unemployment rates, they said.