Rumors of a rate cut lift bank stocks
Battered financial stocks led Wall Street’s rebound Thursday, thanks in part to renewed rumors that the Federal Reserve would cut interest rates to help bolster the financial system.
Small-company stocks, which also have been hammered amid the market’s broad retreat this summer, posted steep gains as well.
But analysts warned that it was difficult to know what was behind the buying of many depressed shares.
Were bargain hunters taking the lead -- or were “short sellers” covering their previous bets that prices would tumble?
Most likely, traders said, it was some combination of both.
The Dow Jones industrial average was down as much as 344 points at midday, continuing the summer sell-off that has been fueled by worries about the financial system.
The market then turned with a vengeance. The Dow ended with a loss of just 15.69 points, or 0.1%, at 12,845.78.
Among broader indexes, the Standard & Poor’s 500 gained 4.57 points, or 0.3%, to 1,411.27, after falling as low as 1,371.
The Nasdaq composite was off 7.76 points, or 0.3%, to 2,451.07.
The Russell 2,000 small stock index surged 2.3%.
Trading reached record levels on the New York Stock Exchange and on Nasdaq.
Financial stocks zoomed. The NYSE financials index jumped 2.4%. An index of Nasdaq bank stocks rocketed 4.2%.
Expectations that the Fed would ease credit sooner than later helped fuel the market’s rebound.
“There’s a rumor of an emergency Fed meeting,” said Thomas Garcia, head of trading at Thornburg Investment Management, which oversees about $45 billion in Santa Fe, N.M. “You’ve got a major credit crunch right now and these guys need to get it together and do something about it.”
Another rumor was that brokerage Bear Stearns, its image slammed after it recently folded two hedge funds that failed because of losses on mortgage-backed bonds, might be bought out by another firm.
“There are rumors around that there is rescue financing coming in for some of the financials, particularly for Bear Stearns,” said Barton Biggs, a former Morgan Stanley strategist who now runs the $1.5 billion hedge fund Traxis Partners.
Bear Stearns jumped $13.29 to $116.44.
The turnabout in the market may have encouraged short sellers to cover their bets. In a short sale a trader borrows stock and sells it, hoping to buy back the shares for less in the near future.
Short sellers have racked up huge paper profits with the market’s pullback in recent weeks. Some may have closed out their bets Thursday by buying stock, which would have added to the rally’s intensity.
Some analysts said bargain hunters may have figured markets were becoming washed out, given the selling wave that occurred in foreign markets before U.S. trading opened and the widespread liquidation of commodities.
It all had the ring of desperate selling, and that often marks a bottom, traders noted.
“You’re starting to probably get some investors who are taking a longer-term viewpoint and looking for stocks that have gotten beaten up,” said Michael Sheldon, chief market strategist at Spencer Clarke in New York.
Among the day’s highlights:
* In the Dow, American Express rose $1.43 to $58.17 and JPMorgan Chase jumped $2.47 to $45.47.
Among other financial issues, Bank of America rose $1.62 to $49.85 and Fannie Mae surged $3.70 to $65.15.
* Some retail issues gained. Kohl’s rose $2.31 to $58.25 ahead of its quarterly earnings report. Results beat expectations. Target was up $1.78 to $59.75.
* Home builders ended with small gains after sliding early in the day. KB Home was up $1.28 to $31.66.
* For a third straight day, unnerved investors fled for the safety of short-term U.S. Treasury securities. The three-month T-bill rate slid as low as 3.29%, then rebounded to end at 3.87% as stocks recovered. It was down from 4.09% on Wednesday.
The 10-year T-note yield ended at 4.66%, down from 4.72% on Wednesday.
