Soothing words from Federal Reserve chief Ben S. Bernanke helped the stock market rebound Tuesday from a plunge to 11-year lows, but investors worried that the rally could be only a short-lived bounce.
By telling Congress that policymakers did not plan to nationalize banks, Bernanke relieved at least temporarily a swirling fear that the government could assume control of major institutions.
If the financial crisis eases, Bernanke added, there is “a reasonable prospect” that the recession will end this year and that a discernible recovery will get underway in 2010.
The Dow Jones industrial average climbed 236.16 points, or 3.3%, to 7,350.94, recouping almost all of what it lost in Monday’s sell-off, which tugged the index down to its lowest point since 1997.
The Standard & Poor’s 500 index and the Nasdaq composite index more than erased their declines of the day before. The S&P;, which also hit its lowest level since 1997 on Monday, surged 29.81 points, or 4%, to 773.14. The Nasdaq composite index jumped 54.11 points, or 3.9%, to 1,441.83.
Investors’ moods also were buoyed by better-than-expected earnings from Home Depot Inc., Macy’s Inc. and Nordstrom Inc. The results, although burnished by cost-cutting, provided a glint of hope that consumer confidence and spending could be stabilizing.
Market watchers said the rally was partly driven by bargain hunters who scooped up stocks after six consecutive losing sessions, a period in which the S&P; lost 11%.
“If nothing else, we were due for a rebound,” said David Dietze of Point View Financial Services in Summit, N.J.
But professionals remained wary. Throughout the bear market that began in late 2007, stocks have recorded a number of powerful one-day pops after sharp sell-offs or declines to new lows. Each time, however, share prices fell back as euphoria gave way to the realization that the economy’s woes were more stubborn than expected.
“There’s nothing that I can see that makes me feel [the rally is] based on anything different than what fizzled out in the past,” said Sam Stovall, chief investment strategist at Standard & Poor’s Corp. “The chances are this could fizzle out as well.”
Still, Bernanke’s comments came as a much-needed tonic for a stressed-out market.
Financial stocks surged after the Fed chairman portrayed nationalization as a last resort that is unlikely to occur.
“I don’t see any reason to destroy the franchise value or to create the huge legal uncertainties of trying to formally nationalize a bank when that just isn’t necessary,” Bernanke told the Senate Banking Committee.
Also, Sen. Christopher J. Dodd apologized for saying Friday that he was “concerned that we may end up” nationalizing some banks at least temporarily. The Senate Banking Committee chairman told reporters that his statement “should have been better thought-out at the time. I didn’t realize it was going to have the reaction it did.”
Financial service stocks in the S&P; 500, which shot up 12%, were the best-performing of the S&P; 500’s 10 broad industry groups. But the sector remains down 36% this year.
Citigroup, which is negotiating a deal that could give the government a 40% direct ownership position in the company, soared 21%. Bank of America also jumped 21%.
JPMorgan Chase gained 8% despite its announcement late Monday of a big dividend cut.
Shares of companies that sell discretionary consumer products were the second-best-performing sector Tuesday, climbing 4.8% on the results posted by retailers.
Tuesday’s rally may have marked an important turning point in market psychology: Government officials talked about the banking system -- and stocks didn’t plummet.
Wall Street’s anxiety over the banks, and its frustration with a perceived lack of clarity in Washington’s plans to rescue the sector, have been major forces behind the stock market’s slump this year. And until Tuesday it seemed that any word from the government on the topic pushed share prices down.
Despite the market’s rally Tuesday, investors might feel better if financial stocks could put together two back-to-back days of double-digit percentage gains.
That’s something that hasn’t happened since the sector’s meltdown began in late September.