Stocks churn - and briefly pull into positive territory - but an afternoon rally doesn't hold, and all three major indexes end the day lower.
By Catherine Clifford, CNNMoney.com staff writer
Last Updated: December 17, 2008: 6:06 PM ET
NEW YORK (CNNMoney.com) -- Stocks ended lower Wednesday as investors tried to shrug off a bigger-than-expected loss from investment bank Morgan Stanley, but an afternoon rally failed to hold traction.
Wall Street took a hit Wednesday in the wake of the severe losses from the nation's second-largest investment bank, but sentiment was still buoyed by the Federal Reserve's rate-cutting announcement Tuesday. At this point in the recession, investors are not easily flustered by yet another loss booked by a financial giant.
The Dow Jones industrial average (INDU) lost 99.8 points, or 1.1%. The broader Standard & Poor's 500 (SPX) index ended down 9 points, or nearly 1%, and the Nasdaq composite (COMP) shed almost 11 points, or 0.7%.
Stocks started the session sharply lower and battled back to positive territory briefly, but in the final hour of the session, stocks gave back all of their earlier gains.
One analyst said that Wednesday's volatility was in line with the market's recent turmoil. "One thing you have to keep in mind is the volatility that we have seen over the past couple months," said Ed Clissold, senior global analyst at Ned Davis Research.
Wall Street's sharp drop at the open was anticipated, given the big gains on Tuesday, when the Dow jumped 360 points, or 4.2%. Even if investors had not been dealing with the news of the massive Morgan losses, stocks would have snapped lower in reaction to the sharp gains on Tuesday, a market observer said.
Harry Clark, chief executive and founder of the Clark Capital Management Group, said the market "is taking bad news in stride these days." While massive financial-sector losses weigh on investor sentiment, Clark said that the market is looking for a recovery.
Clissold echoed the sentiment that the market has been braced for negative news. "When a large financial company reports bad earnings, investors for the most part treat that as what would be expected," Clissold said.
Investors were also still digesting the decision from the Federal Reserve Tuesday to cut the key lending rate to record low levels as it pledged to consider further ways to spur economic activity.
Meanwhile, market breadth was positive. Advancers beat out decliners 3-to-2 on the New York Stock Exchange on volume of 1.34 billion shares. And advancers just beat decliners on the Nasdaq, with a volume of 2.16 billion shares.
Company news: Before markets opened on Wednesday morning, Morgan Stanley (MS, Fortune 500) posted a staggering $2.3 billion loss for the fourth quarter, which was far greater than the $298 million loss that analysts were expecting, according to Thomson Reuters.
The loss was even worse than what analysts were bracing for and was yet another indication that every part of the financial sector has been battered by stock-market volatility and credit-market weakness.
The announcement from Morgan Stanley comes the day after rival Goldman Sachs (GS, Fortune 500) posted a $2.1 billion loss - the company's first since it went public in 1999.
Fed rate cut: Wall Street's pullback Wednesday came on the heels of a rally on Tuesday precipitated by the Federal Reserve cutting its key lending rate to the lowest level on record.
The U.S. central bank lowered its key interest rate to a range of between 0% and 0.25%. The rate cut was the 10th time the central bank has slashed rates in the past 15 months.
The central bank has attempted to juice the economy, which officially fell into recession at the end of 2007, with an aggressive rate-cutting campaign.
However, now that the key lending rate is near zero, the central bank may have to find other ways to spur the slumping economy. In fact, in the Fed's rate-cut statement released on Tuesday, the agency indicated that it would consider purchasing its own long-term Treasurys.
"The Fed has really stepped up," Clark said.
He added that investors have taken comfort in the central bank's moves, as evidenced by Tuesday's rally on Wall Street and improvements in the credit markets.
Another analyst echoed the sentiment. "The Fed has clearly signaled it is going to do whatever is necessary to get the debt markets functioning properly again, which is going to be key for the equity markets," Clissold said. In the long run, Clissold said that a return to health in the credit markets is essential to a broader recovery.
Government debt, currencies: Long-term Treasury prices soared Wednesday, continuing Tuesday's rally that happened in the wake of the Fed's announcement that it would consider buying its own long-term debt.
The goal of the government in stepping in and buying its own debt would be to help the troubled housing market find some footing. Thirty-year mortgages typically move in lockstep with the yield on the benchmark 10-year Treasury note.
Lending rates continued to decline. The overnight Libor rate declined to 0.13% from 0.16% on Tuesday, while the 3-month Libor rate dropped to 1.58% from 1.85%, according to Bloomberg.com. Libor, or the London Interbank Offered Rate, is a daily average of what 16 different banks charge other banks to lend money in London.
The improvements in Libor rates are one indicator of credit-market pressures easing. "They have been coming down for the last two months and they are finally down where they should be," Clark said.
Auto bailout: U.S. automakers are still awaiting news from the Bush administration as to the status of their plea for a $14 billion bridge loan.
General Motors (GM, Fortune 500) and Chrysler LLC have warned that they are within weeks of running out of cash. After the Senate failed to approve a bailout package for the automakers, the Bush administration said it would consider tapping the $700 billion bailout fund Congress approved for the banks and Wall Street.
Meanwhile, the auto finance firm GMAC doubled the amount of capital it has raised, moving it closer to qualifying for much-needed federal funds. If GMAC can obtain enough funds to qualify as a bank, then it could obtain funds as a part of the $700 billion bailout bill.
Oil: Oil settled for the day down $3.54 to $40.06 a barrel, a 4 1/2-year low, after OPEC announced it will cut oil production by 2.2 million barrels a day as of Jan. 1 to boost oil prices. Crude oil prices have slid from record highs as the global economic recession has chipped away at demand for energy.
Oil prices have fallen nearly $100 a barrel since the record highs reached over the summer, and the cartel hopes that the production limit will stabilize oil prices.
The new production cut comes on top of a 2 million-barrels-a-day cut that was previously announced, bringing production levels down by 4.2 million barrels per day from September levels.
Other markets: In currency markets, the dollar fell to a 13-year low versus the yen and also weakened against the euro. The greenback rose slightly against the British pound.
COMEX gold for February was up $25.80 to $868.50 an ounce.
Gas prices rose Wednesday after breaking an 86-day streak of declines over the weekend, according to a daily survey of gas station credit-card swipes. The price of regular unleaded rose $0.6 cents to a national average of $1.667 a gallon from $1.661 on Tuesday, according to motorist group AAA. To top of page
First Published: December 17, 2008: 10:35 AM ET