Stocks fall sharply in final minutes
The Federal Reserve’s half-point rate cut had Wall Street in a party mood Wednesday -- until somebody swiped the punch bowl in the last 10 minutes of the trading session.
At one point late in the day, the Dow Jones industrial average was up 292 points in a rally fueled by the Fed’s 11:15 a.m. PDT announcement that it was cutting its key overnight lending rate from 1.5% to 1% -- the lowest since 2004.
The Dow then plunged almost 475 points in the final 10 minutes of trading. Only a last-gasp bounce held the average’s loss for the day to 74.16 points, or 0.8%, at 8,990.96.
The broader Standard & Poor’s 500 index closed down 10.42 points, or 1.1%, at 930.09, but the tech-laden Nasdaq composite index managed to eke out an increase of 7.74 points, or 0.5%, to 1,657.21, led by a 4.5% gain in Apple.
Although the Dow and S&P; 500 were lower on the day, the overall market showed gains, with winners outnumbering losers 3 to 1 on the New York Stock Exchange.
Analysts had little explanation for the abrupt sell-off, although it has been common in recent weeks for mutual funds, hedge funds and other big investors to dump shares at the end of the day to raise cash to meet redemption demands from their clients. In addition, investors probably were taking profits from Tuesday’s big 889-point gain.
Analysts were hoping for a positive day on Wall Street as a sign that the market was building on the previous day’s advance, which had left many traders skeptical. The Dow hasn’t gone up two days in a row since late September and has recorded gains on only five days this month.
Trading also has been marked recently by wild swings, often with no fundamental basis. Although the Dow was down only by double digits at the closing bell -- making Wednesday just the third day this month the blue-chip index hasn’t posted a triple-digit rise or fall -- analysts worry that the volatile trading is scaring away investors.
“This volatility has to die down for people to really believe in the market,” Brian Stutland, president of Stutland Equities in Chicago, said during Tuesday’s big run-up. “These big moves make people too nervous.”
Meanwhile, credit markets were mixed. Measures of interest rates on loans between banks continued to inch down. But there are concerns that although banks are building up cash reserves, they are reluctant to make loans because of worries about the financial health of their borrowers.
Also, yields on short-term Treasury bills fell, an indication that many investors are still more concerned about safety when it comes to investing their money. The yield on the three-month T-bill fell to 0.58% from Tuesday’s rate of 0.73%.
The rate cut was widely anticipated -- as far back as Friday, Wall Street was betting there was a 75% chance of a half-point cut. But the Fed’s statement was gloomy, citing a “markedly” slower economy and the “intensification of financial market turmoil” as reasons for the cut.
Oil prices jumped $4.77 a barrel to $67.50 after the government reported that crude stockpiles were tighter than expected and traders bet that the Fed rate cut would increase demand for petroleum products. That boosted energy stocks but could be a drag on consumer spending.
The rate cut was less beneficial for the dollar. The greenback, which had been on a tear recently against many major currencies, suffered its biggest one-day loss in a decade against a basket of six major currencies.
The Dow is down 17% this month and off 37% from its all-time high in October 2007.
There could be more losses ahead as investors grapple with the prospect of recessions at home and abroad. The Commerce Department is expected to report today that the U.S. economy shrank 0.5% during the third quarter, the most since the 2001 recession.
One widely accepted definition of a recession is two straight quarters of negative economic growth, and with consumer confidence plunging along with the stock market, the prospects for fourth-quarter growth are grim.
Wednesday’s trading on Wall Street was preceded by big upward moves in most markets overseas. Japan’s Nikkei stock average jumped 7.7%. Britain’s FTSE 100 rose 8.1% and France’s CAC-40 rose 9.2%. Germany’s DAX index declined 0.3%.