Stocks edge down as Wall Street waits

Stocks fell moderately Wednesday as investors awaited a Senate vote on the banking bailout plan, but the credit markets still showed signs of strain. The Dow Jones industrials closed down about 20 points after being down more than 200 points in early trading.

Many investors were reluctant to make any major moves before the Senate vote on a revised version of a plan that was defeated Monday by the House. The Senate approved the new proposal, which includes tax breaks for businesses and the middle class and would raise the limit on deposit insurance, by a 74-25 vote Wednesday night.

While they waited, the markets absorbed economic data that was a reminder of the effect of the credit crunch that is now more than a year old.

The Institute for Supply Management released its widely followed index of factory activity, which fell to 43.5 in September from 49.9 in August. Any number below 50 suggests a retrenchment in manufacturing. Wall Street had expected a reading of 49.5, according to economists polled by Thomson/IFR.

“We’re now seeing in those numbers that we’re getting a contraction in economic activity,” said Jim Dunigan, managing executive of investments at PNC Wealth Management.

At this point in the credit crisis, weak economic numbers are coming as no surprise to Wall Street -- but September’s data are expected to be particularly bleak, reflecting the seizing up of the credit markets that began during the month.

“We’ve taken the credit markets for granted, much like you do the electricity coming on every day, but in this particular case the power grid is down,” Dunigan said. “If we don’t have a functioning credit market, banks aren’t lending to each other, credit is dried up. That ultimately affects economic activity.”

In the credit market, rates rose again on loans between banks with terms of one to six months, suggesting that financial institutions were tightening their already strong grip on cash.

Yields on Treasury securities, meanwhile, slipped as demand for the safety of government debt increased. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.74% from 3.83% late Tuesday. The yield on the three-month T-bill, among the safest investments, fell to 0.79% from 0.88% late Tuesday. The decline in yields indicates that investors are willing to accept even modest returns to protect their money.

The Dow fell 19.59 points, or 0.2%, to 10,831.07. The blue-chip index plunged 777 points Monday after lawmakers rejected the bailout plan, then rallied 485 points Tuesday on hopes that party leaders would find the votes to pass a version of the measure.

The Standard & Poor’s 500 index fell 5.30 points, or 0.5%, on Wednesday to 1,161.06, and the Nasdaq composite index declined 22.48 points, or 1.1%, to 2,069.40.

The Russell 2,000 index of smaller stocks dropped 7.99 points, or 1.2%, to 671.59.

Declining issues outnumbered advancers by about 5 to 4 on the New York Stock Exchange.

Crude futures fell $2.11 to settle at $98.53 a barrel on the New York Mercantile Exchange after the government reported a surprise increase in U.S. crude supplies. The dollar was mixed against other major currencies, while gold prices rose.

Overseas, key stock indexes rose 1% in Japan and 1.2% in Britain. Shares fell 0.4% in Germany and 0.6% in France.