A stunning turnaround for stocks
The gloom on Wall Street suddenly lifted on Wednesday as buyers poured in and fueled a 600-point U-turn in the Dow Jones industrial average.
Banks and other deeply depressed financial stocks led the way higher amid record-breaking trading volume on the New York Stock Exchange.
The Dow, down 327 points at its midday low, ended with a gain of 298.98 points, or 2.5%, at 12,270.17.
The rebound spread across the broad market as well, as bears retreated and bulls gained the upper hand after five days of heavy selling.
Even for veteran market players the day’s price swings were breathtaking.
After the morning rout, “I figured that if we ended the day down 100 that would be a milestone,” said Jack Ablin, chief investment officer of Harris Private Bank in Chicago.
“The fact that we rallied through and closed up nearly 300 is remarkable. In my experience I can’t remember such a big turnaround and I’ve been in this business 25 years,” he said.
The recovery raised hopes that the worst might be over for the market after weeks of falling share prices tied to fears that the U.S. economy may slide into recession.
“A lot of the bad news is already in the market,” said Joseph Veranth, chief investment officer at Dana Investment Advisors in Brookfield, Wis.
At a minimum, stocks were overdue for at least a short-term bounce, analysts said. Many classic signs of a peak in pessimism have been evident in recent days, suggesting that sellers were close to exhausting themselves for the moment.
Some expect share prices to move higher for a few days as buyers who had been waiting on the sidelines for a bottom feel compelled to move in.
“This is a great start to turn the markets around,” said Marc Pado, U.S. market strategist at brokerage Cantor Fitzgerald.
Any respite from the recent selling could at least give investors a chance to get their bearings and decide on their next moves.
Still, the daunting problems that have fueled the sell-off since late summer -- including the housing market’s crash and the damage it has done to the financial system -- aren’t going away soon, and could spread, analysts said.
Mortgage delinquencies continue to surge and some experts see new problems bubbling up at struggling banks and brokerages in loans for commercial real estate and in credit card debt.
Even so, news in the financial sector was a key catalyst for Wednesday’s turnaround.
Financial issues began to rally on reports that New York state insurance regulators met with some major banks to discuss raising capital to buttress struggling bond-insurance companies.
Slammed by losses tied to guarantees they wrote on mortgage-related securities, the bond-insurance firms have loomed as another potential crisis for the financial system.
The prospect of a capital infusion drove insurer Ambac Financial up $5.73, or 72%, to $13.70.
In the banking sector, JPMorgan Chase surged $4.86, or 11.9%, to $45.72. Bank of America jumped $3.18, or 8.5%, to $40.57.
Home builders also soared. KB Home shot up $2.77, or 13.8%, to $22.88 and Pulte Homes rocketed $2.37, or 22.1%, to $13.11.
Banks and builders are high on the list of potential beneficiaries of the Federal Reserve’s emergency cut in short-term interest rates Tuesday.
After severe selling in foreign stock markets Monday, the Fed slashed its key rate to 3.5% from 4.25% before the opening bell Tuesday.
Despite the central bank’s move, the Dow fell 465 points at the start of trading Tuesday, then recouped most of that loss to end down 128.11 points.
Early Wednesday the Dow sank anew, raising fears that investors were losing faith in the Fed’s ability to bolster the economy with cheaper credit. Another round of deep declines in European markets set a poor tone as Wall Street opened.
Some analysts said the Fed’s large rate cut, coupled with expectations of another reduction next week, may have had the unintended effect of spooking investors.
“Everybody is going, ‘What in the world is going on? These are the kinds of things you do to stave off the Great Depression,’ ” said Brian Wesbury, chief economist at First Trust Advisors in Lisle, Ill.
But as financial stocks turned Wednesday, buyers took control and the turnaround built on itself as the session progressed.
“You’re starting to see some value players step in,” said Dan McMahon, a trader at CIBC World Markets in New York.
In a potential sign of faith in the economy, some buyers went for shares of companies that are sensitive to the economy’s swings. Rail giant Norfolk Southern jumped $4.34 to $49.41. Appliance maker Whirlpool leaped $6.52 to $81.01.
It helped investors’ overall mood that crude oil prices fell to a three-month low, sliding $2.22 to $86.99 a barrel.
For the day, the Standard & Poor’s 500 index gained 28.10 points, or 2.1%, to 1,338.60.
The Nasdaq composite rallied 24.14 points, or 1.1%, to 2,316.41 -- even though shares of Apple sank $16.57, or nearly 11%, to $139.07 after its disappointing quarterly earnings report late Tuesday.
Early Wednesday the Nasdaq index fell into bear market territory dropping to a level more than 20% below its recent peak. At its Wednesday low of 2,202, Nasdaq was down 23% from its high in October.
Other indexes had already slid into bear-market declines in recent weeks.
The Dow, however, has held above that threshold. At its worst level Wednesday it was down 2,520 points, or 17.8%, from its all-time high in October.
Even though the Dow hasn’t confirmed it, however, “we are definitively in a bear market,” McMahon said.
He and others warned against getting too excited about a one-day bounce. If the economy worsens significantly in the first half of this year the market may have much further to fall, they say.
Bear markets often are peppered with dramatic but short-lived rallies, McMahon noted.
Some of the buying Wednesday may have been the work of short sellers -- traders who borrow stock and sell it, hoping the price drops. If the market rises instead of falls short sellers often scramble to close out their bearish bets. Their buying can help produce explosive rallies in stocks that have fallen sharply.
Some investors sold Treasury bonds to buy stocks, driving up yields on the bonds from the multiyear lows they reached in recent days.
The two-year T-note rose to 2.10% from 2% on Tuesday. The 10-year T-note rose to 3.55% from 3.44%.
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tom.petruno@latimes.com
