Wall Street struggle reaches globally

The Associated Press

NEW YORK — An unusual emergency interest rate cut by the Federal Reserve gave Wall Street a partial rebound Tuesday from a precipitious early decline — and perhaps the first steps toward a long-term recovery. The rest of the comeback, for the economy as well as the stock market, may depend on a turnaround in the battered housing market and renewed confidence among U.S. consumers.

The Dow Jones industrial average, down 465 points shortly after trading began, bounced around throughout the session before closing with a milder drop of 128.11, or 1.06 percent, at 11,971.19, according to preliminary calculations.

U.S. stocks began the day following the lead of markets abroad that had plummeted for two straight days, and also extended their own steep losses from last week. Fears of a U.S. recession — one that would spread to other economies — had investors fleeing stocks worldwide.

The Fed, in a step anticipated by many traders, moved before the opening of trading, cutting its benchmark federal funds rate by 0.75 percentage point to 3.50 percent and the discount rate, the interest the Fed charges banks directly, to 4 percent. What was unusual was the reduction’s coming between regularly scheduled meetings of the central bank’s policy-making Open Markets Committee; the next gathering is a week away.

Also, the cut was larger than the half-percentage point expected to be announced at the end of that two-day meeting, and the widest cut in the target fed funds rate on records going back to 1990.

The fact stocks didn’t continue their steep plunge — the Dow fell 277 points on Tuesday and 307 on Thursday — was a positive sign, but economists and analysts said a full recovery wasn’t likely in the near term.

One of the market’s greatest concerns is that consumers, who normally account for two-thirds of the economy, aren’t in a position to spend the country back into solid growth. Even if rates continue to fall, Americans have been showing increasing signs of cutting back rather than borrowing or spending, even during the holiday season.

“People are up to their eyeballs in debt, and they’re being asked to borrow more,” said Mike Schenk, senior economist for the Credit Union National Association.

“This is a cure for the wrong disease. It makes everybody feel good, but it’s not going to have any ongoing benefit,” said Daniel Alpert, managing director of Westwood Capital LLC. “We need to get ourselves out of a mountain of debt and overvalued properties.”

But interest rate reductions are one strategy the Fed has used in previous crises to help the economy recover. A rate cut tends to spur the economy by making it cheaper for businesses to borrow money. It would also lighten the burden on people with credit card debt and mortgages that have adjustable rates.

Still, its effect on Wall Street wasn’t overwhelmingly positive. The Standard & Poor’s 500 index, the broad market measure most closely followed by traders, fell 14.69, or 1.11 percent, to 1,310.50, while the Nasdaq composite index lost 47.75, or 2.04 percent, to 2,292.27.

Stocks have been beaten down for months amid the housing and mortgage crisis that began with a stream of failed home loans to consumers with poor credit. The Dow, for example, is down nearly 10 percent since the beginning of the year — logging its worst first 14 trading days of the year ever. It is more than 15 percent since its record close of 14,16.53 on Oct. 9, and is at its lowest close since Oct. 17, 2006.

Investors are well aware that housing worries remain: Many adjustable-rate mortgages — similar to those that went bad last year — will still be adjusted higher, and home prices are expected to keep falling this year. Financial companies have lost billions due to those mortgages, retail sales are falling and companies in general aren’t on a spending spree.

Investors, institutional and individual, are also in a defensive mode, one that an interest cut won’t immediately change. In the week ended Jan. 15, when many on Wall Street believed a rate cut was in the offing, investors shoveled money into cash reserves at a record pace, according to iMoneyNet. Assets in money market funds ballooned by $15.96 billion to a high of $3.17 trillion.

And investors pulled an estimated $18.2 billion from mutual funds, according to TrimTabs Investment Research. So far this year, investors have shifted $41.4 billion out of these investments.

Richard Resch, a 60-year-old salesman at a steamship company, said he met two nights ago with his financial planner to rebalance his money from an 80-20 split in stocks and bonds to a more conservative 50-50 split. His planner told him to hang in there.

“There’s no point in panicking now,” said Resch, who lives in Long Valley, N.J. “If you see me jump out of a window six months from now, you’ll know I was wrong.”

For the market to truly gain a foothold, investors need to see strong economic and earnings data in the coming months, including earnings reports and forecasts this week from big multinational companies like Microsoft Corp., AT&T Inc., Caterpillar Inc. and Honeywell International Inc. The market also needs to hear that financial institutions like Citigroup Inc. and Merrill Lynch & Co., which have lost billions due to investments in failed mortgages, are on their way to solid earnings as well.

“If that doesn’t happen, then all this is a short-term bottom before a resumption of selling,” said Peter Boockvar, equity strategist at Miller Tabak.

What it might take to ultimately turn the market around is its own dynamics. When investors feel the market has indeed gone as low as it should, they’ll start buying, even if the economy is not yet barreling higher. The pack mentality of Wall Street could be the market’s biggest driver — it’s what triggered comebacks in the past, and one reason experts say long-term investors should sit tight.

A recovery might take months or years. After the technology bust of 2000 and the terrorist attacks of Sept. 11, 2001 sent Wall Street into a deep bear market, the market took several years to turn around — and at that time, Americans had something sure, something physical, to put their money and confidence in: their homes.

That economic pillar, which helped support spending, has cracked. People who took out giant mortgages with tiny down payments, or who used their homes’ value to borrow money, no longer have the security of home equity amid a slumping housing market. Moreover, banks that were burned writing mortgages for consumers with shaky credit are now wary of lending, especially since other types of consumer debt, including car loans and credit cards, are seeing defaults rise.

The Bush administration has proposed ways to ease Americans’ plight, first with a plan to prevent more mortgages from going sour, and, last week, with an economic stimulus packing that included $145 billion in tax cuts. On Tuesday, the White House said President Bush won’t rule out the possibility of a larger package.

But like interest rate cuts, a stimulus package, which would first need the approval of Congress, would not work immediately.
“Economists are not generally impressed by a fiscal stimulus, because it takes a long time to produce the desired effect,” said the Credit Union National Association’s Schenk. He explained that some people — shrewdly — would save the money they receive instead of spend it.

European stocks joined their U.S. counterparts in rebounding after the Fed’s rate reduction. Britain’s FTSE 100 rose 2.90 percent, France’s CAC-40 rose 2.07 percent, Germany’s DAX index pared its loss to 0.31 percent.

In Asian trading, which ended before the Fed move, Japan’s Nikkei stock average closed down 5.65 percent — its biggest percentage drop in nearly a decade. Hong Kong’s Hang Seng index lost 8.65 percent a day after showing its biggest losses since the Sept. 11, 2001, attacks.

In other trading Tuesday, the yield on the benchmark 10-year Treasury note, which moves opposite its price, sank to 3.48 percent from 3.63 percent late Friday.

Crude oil prices fell 72 cents to settle at $89.85 a barrel on the New York Mercantile Exchange on concerns that a weak economy will dampen energy demand. The dollar fell against most other major currencies except the yen, while gold rose.

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