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A Market Rebound for the Record Books
11% Surge Reflects Growing Confidence in Global Crisis Response

By Renae Merle
Washington Post Staff Writer
Tuesday, October 14, 2008

Wall Street roared back yesterday, rebounding from last week's dismal performance with its largest rally in 70 years and revealing renewed confidence in U.S. and global efforts to combat the financial crisis.

After finishing the worst week in its more than 100-year history, the Dow Jones industrial average blew past several milestones, closing up 11.08 percent, or 936.42 points, at 9387.61. It was the fifth-largest rally in history on a percentage basis and the largest since the Great Depression. It was also, by far, the Dow's largest point gain, and it snapped an eight-day losing streak fueled by deepening concerns of a global recession. Most of last week's historic 18 percent loss was wiped out.

The Standard & Poor's 500-stock index, a broader index watched by market professionals, was up 11.58 percent, or 104.13, to 1003.35 -- its best one-day gain since 1939. The tech-heavy Nasdaq composite index was up 11.81 percent, or 194.74, to close at 1844.25.

"Holy cow! This is gargantuan, and if it continues tomorrow, that would be even better," said Art Hogan, chief market analyst at Jefferies & Co. "You have to remember how low we have gotten. It's great to remind investors that the market goes up, too."

After being steeped in frustration and fear for nearly two weeks, investors and traders seemed more confident in global efforts to stem the financial crisis. The British government said it is injecting capital directly into three troubled banks, while the U.S. Treasury is finalizing plans for a similar program that would spend $250 billion to buy ownership stakes in a broad range of banks. U.S. regulators are expected to announce an expanded response to the crisis today, including unlimited deposit insurance for non-interest-bearing accounts, such as checking and payroll accounts used by small businesses.

"It feels like we're beginning to get the feeling that regulators and governments are doing what they have to, to get the liquidity flowing again," said John Wilson, co-head of the equity group at Morgan Keegan in Memphis.

Morgan Stanley, a battered Wal Street firm, helped lead the rally after announcing that it had closed a $9 billion deal with the Japanese bank Mitsubishi UFJ Financial. The company's stock had been dragged down by concerns that the deal -- and the needed cash infusion -- would fall through. Morgan Stanley's stock gained 87 percent, to close at $18.10. It is still down more than 60 percent for the year.

Large-scale sell-offs are often followed by a rebound. But the size of yesterday's gain reflects pent-up bargain hunting, analysts said.

"I think there are some people out there that think things are so bad, it can't get much worse," Wilson said. Institutional and individual investors have pulled a tremendous amount of money out of the market in recent weeks that they may be willing to use again, he said.

But it's unclear whether the rally signals a market turnaround or a brief reprieve. The bond markets were closed for Columbus Day, and many traders took the day off, analysts said. The test of the market rebound's significance will be whether banks remain reluctant to lend to one another -- the crux of the current financial crisis -- and that will take more time to determine, they said.

"I am not sure whether this rally is sustainable. We're going to have to wait and see," said Joseph Brusuelas, chief U.S. economist at Merk Investments. "I am not ready to call this a market bottom yet. We have some bad [economic data] and a bad earnings season ahead of us."

The economic outlook remains weak, and a global recession is still likely, said Win Thin, senior currency strategist for Brown Brothers Harriman. "It seems like the Europeans have snapped the panic, and if it continues tomorrow," the rebound would be significant, he said. "The U.S. may need to do something more to keep up the confidence" of the market, perhaps borrowing elements of the British and European rescue plans, he said.

The Dow was also led yesterday by General Motors, which surged 33 percent, to $6.51 a share. The company is still off 70 percent for the year, but investors appear focused on recent reports that General Motors was considering a merger with Chrysler, which is owned by Cerberus Capital Management, a private-equity group. Both automakers have been bruised by a severe industry downturn.

Meanwhile, after falling below $80 a barrel for the first time in a year last week, oil prices also staged a rebound. The price of light, sweet crude jumped 4.5 percent, or $3.49, to settle at $81.19 a barrel on the New York Mercantile Exchange.

The trajectory is still negative, analysts said. In a research note, Goldman Sachs said it expects the oil cycle to remain "cyclically weak" at least through the first half of 2009 and that prices could fall to $75 a barrel by the beginning of the year. "There has been a dramatic change in financial market conditions over the past month and at this point we cannot look back and dream about what might have been," said the report, from analyst Arjun Murti.

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