Wall Street pulls back after big rally
NEW YORK » Stocks pulled back sharply yesterday, erasing most of the previous session's big gains as investors grew concerned about the possibility that banks remain vulnerable to further problems from soured debt. The Dow Jones industrial average fell nearly 300 points after rising 420 on Tuesday.
Talk swirled about whether further write-downs are in the offing after Merrill Lynch & Co. filed a lawsuit against a company involved in a debt transaction with the investment bank. Merrill claimed in the litigation that Security Capital Assurance Inc. owed it up to $3.1 billion after backing out of financial transactions.
News that the government plans to free up billions of dollars at Fannie Mae and Freddie Mac, a move that could help struggling homeowners, for a time helped quell some of the market's fears. But it couldn't stave off selling late in the session by investors who have seen big advances evaporate many times during the course of the credit markets crisis and decided to preserve some of their gains.
George Shipp, chief investment officer at Scott & Stringfellow, said some investors are still uneasy about the health of the markets. He said back-and-forth days will likely continue as Wall Street tries to feel its way forward.
"Nobody wants to make the first move. There is liquidity on the sidelines. It doesn't really know what to do right now," he said, adding that investors are trying to determine whether moves by the Fed and other regulators to stimulate the economy and stabilize the markets will take hold.
"Clearly there is fear. I would say the needle is pointing more toward fear than greed right now," he said.
The Dow fell 293.00, or 2.36 percent, to 12,099.66. Broader stock indicators also declined. The Standard & Poor's 500 index fell 32.32, or 2.43 percent, to 1,298.42, and the Nasdaq composite index fell 58.30, or 2.57 percent, to 2,209.96. The Russell 2000 index of smaller companies fell 17.80, or 2.61 percent, to 664.13.
Declining issues outpaced advancers by more than 2 to 1 on the New York Stock Exchange, where volume came to 1.97 billion shares compared with 1.95 billion shares traded Tuesday.
Bond prices jumped as investors again looked for safety. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.34 percent from 3.50 percent late Tuesday. The dollar was mixed against other major currencies, while gold prices fell sharply.
Light, sweet crude fell $4.94 to settle at $104.48 per barrel on the New York Mercantile Exchange after government figures suggested the high price of oil and gasoline are damping demand for petroleum products.
The concerns over the soundness of the financial system and the economy overshadowed upbeat results from Morgan Stanley, whose earnings indicated that the bank is relatively healthy like Lehman Brothers Holdings Inc. and Goldman Sachs & Co. Investors have been nervous in recent days about even big banks after JPMorgan Chase & Co. struck a deal Sunday to acquire Bear Stearns, which was on the verge of succumbing to credit troubles.
Morgan Stanley rose 59 cents yesterday to $43.45. Lehman fell $4.26, or 9.2 percent, to $42.23, while Goldman declined $9.10, or 5.2 percent, to $166.49.