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Originally published January 23, 2008 at 12:00 AM | Page modified January 23, 2008 at 6:46 PM

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Dow up 300 as Wall Street rebounds from sharp losses

Wall Street pulled off a stunning comeback today, surging higher in late trading and wiping out what looked to be yet another precipitous...

The Associated Press

NEW YORK — Wall Street pulled off a stunning comeback today, surging higher in late trading and wiping out what looked to be yet another precipitous decline. The Dow Jones industrials, down more than 323 points in earlier trading, ended the day with an advance of just under 300 points.

While such volatility has become a hallmark of Wall Street's performance in recent months amid the ongoing housing and credit crisis, analysts saw some positive signs in the day's trading.

"There does come a point and time when the market itself recognizes that it got out of hand, and that is when bargain-hunters can come in," said Peter Cardillo, chief market economist at Avalon Partners.

The Dow Jones industrial average rose 298.98, or 2.5 percent, to 12,270.17.

The two Northwest companies included in the 30 Dow stocks didn't follow the trend, however: Microsoft slipped 6 cents to close at $31.93; Boeing fell $1.03 to $76.57.

Before today's session, the Dow had fallen nearly 10 percent since the start of the year, and it was down more than 15 percent since its record close of 14,164.53 on Oct. 9.

Today's swing from negative to positive territory of 631.86 points is the largest point swing since July 24, 2002, according to Dow Jones Indexes. The largest intraday point swing, a metric that Dow started calculating in July 1995, was a 721-point swing on April 14, 2000.

Broader stock indicators also surged. The Standard & Poor's 500 index rose 28.10, or 2.1 percent, to 1,338.60, while the Nasdaq composite index rose 24.14, or 1 percent, to 2,316.41.

The Fed's decision Tuesday to lower its federal funds rate by 0.75 percentage point to 3.5 percent has been met with some skepticism, but it gave intrepid investors today a reason to buy the severely dented stocks in the financial sector.

"You might say this is a belated reaction to what the Fed did this week, compounded by hopes for the Fed to do more next week," Cardillo said. Traders who bet on the Fed's target fed funds rate were pricing in today a 100 percent chance of a 0.5 percentage-point cut by the central bank when it meets next week.

Rate cuts will eventually boost margins for banks and other lenders, which have been working to lower costs and boost cash levels through layoffs and stock sales. Those companies — like Washington Mutual, Citigroup and Merrill Lynch — were the big winners today.

Moreover, the billions of dollars in mortgage-related losses suffered by the financial companies contributed to months of selling on Wall Street.

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"The early leaders in a market recovery tend to be banks, REITs (real estate investment trusts) and homebuilders, as these are the groups that typically would benefit first from a turnaround. And those have been the market leaders this week," said Steve Goldman, chief market strategist at Weeden & Co. "What has happened is the Fed is flooding the system with liquidity and eventually we should see some traction in the economy. And stocks tend to respond first."

Still, analysts were mindful that in the past months, Wall Street has been known to soar one day and succumb the next, and that there are still many economic unknowns for the market to weather. And, given that stocks are so badly beaten down, bargain hunting played a part in today's turnaround.

Bond prices turned lower as stocks rebounded. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell in earlier trading but then recovered to 3.55 percent, up from 3.41 percent late Tuesday.

At its lowest point Tuesday, the Dow was 17.9 percent below its October closing high, meaning that the stock market has come perilously close to the bear market threshold of 20 percent. It's unclear whether Wall Street will indeed keep falling and officially enter a bear period, or whether it is bottoming out.

Buying, like selling, can feed on itself and investors may go into the market to be sure they don't miss out on a rally. What needs to be seen is whether these gains will easily be knocked down again.

"Volatility is certainly the norm now and not the exception," said Art Hogan, chief market strategist at Jefferies & Co. "We have had 14 trading days so far this year and only two of them have been without a triple-digit swing (in the Dow). Three of those days have had 300-point swings."

Wall Street faces several months of uncertainty, with the bulk of fourth-quarter earnings reports still to come and with economic reports likely to be disappointing. When it's more clear that companies and consumers are spending freely, investors might relax.

However, with consumers burdened by debt and in the process of cutting back their spending, it's impossible to predict when that relief will come.

The dollar was mixed against other major currencies today, while gold prices fell.

Battered small-cap companies — which rely heavily on borrowing to grow their businesses — got a lift today. The Russell 2000 index of smaller companies rose 21.86, or 3.26 percent, to 693.43.

Before the turnaround in U.S. stocks, European stocks closed sharply lower on economic worries and escalating uncertainty about the European Central Bank's willingness to lower rates. Britain's FTSE 100 closed down 2.28 percent, Germany's DAX index fell 4.88 percent, and France's CAC-40 fell 4.25 percent.

In earlier Asian trading, Japan's Nikkei stock average closed up 2.04 percent after falling 5.7 percent Tuesday. Similarly, Hong Kong's Hang Seng index surged 10.72 percent — its biggest gain in 10 years — after falling 13.7 percent in the previous two sessions.

Associated Press reporters Leslie Wines and Tim Paradis in New York contributed to this story.

Copyright © 2008 The Seattle Times Company

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