Stocks Tumble As Rate Cuts Fail to Ease Economic Fears
Thursday, October 9, 2008
Wall Street brushed off the Federal Reserve's latest attempt to stem the financial crisis yesterday, taking wild swings before stocks plunged deep into the red.
Investors have endured six straight days of losses and were caught between cheering a cut in a key interest rate yesterday and fearing that it is already too late to avoid a global recession.
The Dow Jones industrial average fell 2 percent, or 189.01 points, to 9,258.10. The technology-heavy Nasdaq composite index and broader Standard & Poor's 500-stock index had smaller losses. The Nasdaq was down .83 percent, or 14.55 points, to close at 1,740.33. The S&P fell 1.13 percent, or 11.29 points, to 984.94.
The markets fell in early trading after the Federal Reserve said it would cut the target federal funds rate to 1.5 percent from 2 percent and was matched by rate cuts in Canada, Britain, Sweden, Switzerland and by the European Central Bank. Stock prices fluctuated throughout most of the day, with the Dow surging as much as 2 percent. But the market turned negative in late trading after Treasury Secretary Henry M. Paulson Jr. reduced investors' expectations that a further federal intervention into the financial markets was imminent.
"I have never seen this type of volatility. It reflects very high levels of uncertainty," said Sean Ryan, a banking analyst at the Sterne Agee brokerage firm in New York. "People who look at financials all day and understand the fundamentals very well still can't make heads or tails of what's going on."
The day included some bargain hunting after several sessions of losses, but it didn't hold, analysts said. The market could turn more volatile today when a ban on short selling is scheduled to be lifted. Short sellers seek to profit from falling stock prices by borrowing shares and then selling them. If the price on the shares later drops, they buy cheaper shares to cover the borrowed ones and pocket the difference.
"There are great deals, bargains out there. You just have to have the intestinal fortitude to go out there and get them," said Art Hogan, chief market analyst at Jefferies & Co. "People are shellshocked and scared to go out there and buy something and then see it go down another 10 percent."
The Dow was led down by Alcoa, which reported a 52 percent drop in third-quarter profit late yesterday and said it would conserve cash by suspending its stock buyback program. The aluminum maker fell 12 percent to $14.71 a share.
While most of the banking sector received some relief yesterday, Bank of America was battered for another day after reporting earlier in the week a net loss for the third quarter and that it would need to raise capital. The large consumer bank fell 7 percent to $22.10 a share following a 26 percent price drop yesterday. JP Morgan was flat and Wells Fargo gained 4 percent. Oil prices continued a two-month slide, down $1.11, or 1 percent, to $88.95 a barrel. The price of gold, a traditional safe haven during market turmoil, was up $24.70 an ounce.
The markets have been weighed down by concerns that U.S. efforts to stabilize the economy have yet to have a significant impact. Yesterday's rate cut will make it cheaper for companies to borrow money and lower the cost of a variety of consumer credit options such as bank credit cards and auto loans. But, analysts said, that doesn't mean that banks will be more willing to lend to each other, a key aspect of the current crisis.
"Officials didn't even have time to pat themselves on the back before the market said 'So what? This doesn't address the problem,'" said Marc Chandler, global head of currency strategy at Brown Brothers Harriman. "The crisis is not driven because interest rates are too high. . . . Every time officials do something that doesn't work, it breeds even greater anxiety."