CALDEIRÃO DE BOLSA

Stocks bounce back as investors jump back in after steep selloff that left the Nasdaq in bear market territory.


Despite beating estimates, the iPod maker's shares slumped in after-hours trading when it warned about the possiblity of a less-than-stellar second quarter.
Play video

NEW YORK (CNNMoney.com) -- Blue chips rallied Wednesday afternoon, with the Dow bouncing back from a more than 300-point loss earlier in the session, while the Nasdaq erased losses sparked by Apple's profit warning.

The Dow Jones industrial added almost 300 points, after having fallen more than 300 points earlier in the session. The Standard & Poor's 500 (SPX) index rose 2.1 percent.

The Nasdaq composite gained 1 percent after sinking more than 3 percent earlier in the session.

The three major gauges have slumped for five sessions in a row amid worries that the credit and housing market crises will send the U.S. economy into recession. Global stocks have slipped too.

On Tuesday, the Federal Reserve announced an emergency intermeeting rating cut, a decision that got some mixed ratings from critics, but nonetheless helped the market close off its lows.

After sliding throughout Wednesday's session, stocks rallied near the close, with investors scooping up some of the stocks that were hit the hardest in the recent selloff.

Financial sector: Big banks jumped, with JP Morgan Chase (JPM, Fortune 500) gaining more than 11 percent. Citigroup (C, Fortune 500), Merrill Lynch (MER, Fortune 500), Morgan Stanle (MS, Fortune 500)y and Lehman Brothers (LEH, Fortune 500) all bounced at least 5 percent as well.

The sector also benefited after Bear Stearns upgraded the sector, citing the potential for upside as a result of the Fed's interest rate cut.

Bank of America (BAC, Fortune 500), which reported quarterly earnings that missed estimates Tuesday, also rose.

Techs remained in the red, due to weakness in Apple. The tech-heavy Nasdaq has now tumbled more than 20 percent from its highs in October.

The tech-laden index has now dropped more than 20 percent from the peak it hit in late October, putting it in bear market territory. As of this afternoon, the S&P 500 was down more than 280 points or almost 18 percent off its all-time high hit in October. The Dow had fallen more than 2000 points, or almost 17 percent since peaking in October.

"Although stock prices might fall tomorrow and beyond, the market did just contract more than 2,000 points in three months, and so people are going to be willing to jump in to certain areas," said Gary Webb, CEO at Webb Financial Group.

The Fed rate cut: The turmoil in global markets prompted the Federal Reserve to abruptly cut interest rates three-quarters of a percentage point, to 3.5 percent, on Tuesday. The Dow initially dropped 450 points on the news, but recovered to finish down 128.

Some investors are expecting the Fed to cut rates further when the central bank policy makers meet next week, suggesting that Fed still sees risks to growth.

Harry Clark, founder and CEO of Clark Capital Management, said the markets are still digesting the Fed's action, which he called a "historic event."

"It will come in fits and starts, but we'll eventually get a rally out of this thing," he said in reference to the rate cut.

Earnings reports: After the market closed Tuesday, iPod and iPhone maker Apple (AAPL, Fortune 500) reported strong earnings for the fourth quarter but warned that the current quarter could be pressured by slowing consumer spending. Shares of the consumer electronics company traded more than 14 percent lower in afternoon trade.

Before the opening bell Wednesday, Motorola (MOT, Fortune 500), the nation's largest cell phone maker, said profit from continuing operations fell in the fourth quarter, but earnings excluding certain charges actually beat estimates. Shares of the company were down more than 18 percent Wednesday afternoon.

ConocoPhillips (COP, Fortune 500), the nation's No. 3 oil company, posted a 37 percent increase in profits for the fourth quarter, thanks to higher energy prices.

Dow component Pfizer (PFE, Fortune 500) reported sales and earnings that beat Wall Street estimates and raised its full-year sales projections. Shares gained 2.5 percent.

Student lender Sallie Mae (SLM, Fortune 500) reported a $1.6 billion loss in the fourth quarter and set aside $575 million to cover expected loan defaults.

Banks are down, but not yet out
In other economic news, the Congressional Budget Office expects the U.S. budget deficit to grow to $250 billion this year, though that number may need to be revised once an economic stimulus package being debated in Washington is released.

President Bush proposed a $145 billion plan to boost the nation's economic activity last week, but details have not been finalized.

Market breadth was positive. On the New York Stock Exchange, winners beat losers almost three to one on volume of 2.8 billion shares. On the Nasdaq, advancers beat decliners by roughly two to one on a volume of 3.6 billion shares.

Treasury prices slipped, giving up early gains. The decline sent the 10-year note yield up to 3.45 percent from 3.42 percent late Tuesday. The yield on the 2-year note briefly reached a four-year low of 1.86 percent during Wednesday's session before recovering.

The fiscal stimulus plan and emergency rate cuts failed to revive stocks. Can anything turn the market around?


NEW YORK (CNNMoney.com) -- With the Nasdaq briefly falling into bear market territory and the Dow and S&P getting closer to that status, it is clear that Wall Street doesn't believe fiscal stimulus and big rate cuts can prevent a recession.

And despite a late-day rally that lifted stocks Wednesday afternoon, some analysts think the market won't bounce back significantly in the foreseeable future.

Peter Morici, a professor at the University of Maryland School of Business, said a stimulus package and rate cuts won't be enough to fix the collapse of the credit markets.

Morici said that investors have a "lack of confidence" in bond ratings agencies and noted that Wall Street continues to worry about the possibility that some large bond insurers, such as MBIA (MBI) and Ambac Financial (ABK) could be "on the verge of default."

As a result, he said investors are worried the economy is going to continue to tank and that the structural problems in the financial sector are too big to be fixed by the government's current plan.

This gloom is weighing heavily on the market. Before Wednesday's rally, the Nasdaq (COMP) and the Russell 2000 (RUT.X) small-cap index were both down more than 20 percent from their cyclical highs, the textbook definition of a bear market. The Dow Jones industrial average and the broader S&P 500 (SPX) index are not there yet. But all the major gauges could soon be in bear territory. Here's why.

Wall Street skeptical of 'stimulus' plan. On Friday, President Bush outlined a plan that calls for about $150 billion in tax breaks. The plan, not yet approved by Congress, is meant to spark consumer spending, which fuels around two-thirds of gross domestic product (GDP) growth.

One proposal is the elimination of the ten percent tax bracket, which would mean rebates of about $800 for a single person and $1600 for married couples. (Full story).

The problem is that some market observers think tax breaks will only provide a temporary boost to consumers.

"Why would a one-time check make such a difference?" said George Feiger, CEO at Contango Capital Advisors, a wealth management firm.

For example, Feiger said consumers might use some of the rebate money to buy something, say a new hat. If enough people do that, the hat retailer can clear out some excess inventory, which is good.

But once the tax rebate is spent, there's no incentive for a consumer to buy another hat. And that means there's no reason for the retailer to restock. In other words, consumers are unlikely to spend their way out of an economic downturn.

Fed actions fail to reassure. On Tuesday, the Federal Reserve cut the federal funds rate - a key overnight lending rate that affects consumer loans - by three-quarters of a percentage point to 3.5 percent. The bank cut the discount rate, the cost at which banks can borrow from the Fed, by three-quarters of a point to 4 percent.

The emergency cut came over a week ahead of the scheduled meeting and was the first intermeeting cut since September 2001, in the midst of a recession and the panic following the 9/11 attacks. It was also the biggest fed funds rate cut since 1984. (Full story)

Yet, stocks tanked. Some worry that even though the Fed has cut rates three other times since September and is expected to keep lowering rates in the coming months, this may not do much in the short run.

"The Fed is trying to prop up the housing market, but the banks aren't in a position to extend credit, so it's not going to help consumers," said Haag Sherman, managing director at Salient Partners.

The emergency rate cut has also raised the specter of higher inflation at a time when oil and gold prices are not far from all-time highs and the dollar is relatively weak.

The 2001 plan had mixed results. Wall Street may also be skeptical because it remembers recent history.

The bursting of the tech bubble sent the economy into recession in March 2001, with the slowdown exacerbated by the aftermath of the 9/11 attacks. The recession is considered to have "ended" in November 2001, according to the National Bureau of Economic Research's official calculation.

The government tried to boost the economy by enacting a fiscal stimulus plan in 2001 that also relied on tax refunds. And the Fed aggressively cut interest rates that year. But this did little to bolster the economy or the stock market until late 2002.

Despite the government intervention and Fed's rate cuts, 2001 proved to be the second year of a three-year bear market. Stocks fell again in 2002 but finally bottomed in October of that year.

"The reality was it (the 2001 plan) was not that effective," said Hank Smith, Chief Investment Officer at Haverford Investments. "Consumers used the majority of the one-time payment to pay down debt and increase savings and consequently the economy only received a little boost."

What might help. Tax cuts for businesses could help, said Mark Travis, president and CEO Intrepid Capital Funds.

Tavis said that when the government lowered the capital gains and dividend taxes in 2003 it sparked a nice run in stocks. "If they made those cuts permanent or lowered them even more, the market would take off like a house on fire."

Reassurance from financial services companies - the sector most directly impacted by the subprime and credit crises - would help too.

"We need some banks to step up and say 'we've finally put everything behind us,' and the leadership should come from Merrill Lynch (MER, Fortune 500) and Citigroup (C, Fortune 500)," said Ram Kolluri, president at Global Investment Management.

Finally, it's just a matter of waiting it out a bit longer.

"Stock markets are reacting poorly due to problems specifically related to the financial sector," said Richard Behler, senior portfolio manager at Chartwell Investment Partners. "The market needs time to gauge the depth of these problems."