Stocks dive on worries of U.S. recession

By Madlen Read

NEW YORK – Wall Street struggled to steady itself Tuesday, climbing back from an early plunge after the Federal Reserve implemented an emergency interest rate cut in hopes of restoring stability to a faltering U.S. economy. The Dow Jones industrials, down 465 points at the start of the session, recovered to a loss of more than 180 points.

The U.S. markets joined a global selloff amid growing fears that a recession in the United States could send economies around the world into a downturn. Though stocks regained ground as investors digested the Fed’s move to cut its benchmark federal funds rate by 0.75 percentage point and as bargain-hunters entered the market, trading remained volatile and the major indexes fluctuated sharply, at times approaching the break-even point before heading down again.

The Fed’s move was unusual, coming between regularly scheduled meetings and just a week before the next gathering of the central bank’s policy-making Open Markets Committee. It was also larger than the half-percentage point that was widely anticipated to be announced at the end of that two-day meeting, and the largest cut in the fed funds rate on records going back to 1990.

But it created little, if any, optimism on Wall Street, in part because some analysts were predicting at the end of last week, when the Dow suffered back-to-back triple digit drops, that the Fed might act sooner rather than later. And stocks have been falling steeply for months because of the ongoing housing, mortgage and credit crisis and its impact on the overall economy; many investors believe much more is needed to right the markets and the economy.

The rate cut helped stanch the stock drop because “the equity markets are so used to the kneejerk reaction that if it’s cheaper for companies to borrow, earnings will go up,” said Daniel Alpert, managing director of Westwood Capital LLC. “But throwing more cheap money into the equation doesn’t help the fact that we have a credit crisis on our hands.”

For the market to truly gain a foothold, investors need to see strong economic data in the coming weeks and solid 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.

U.S. bonds were mixed, with investors seeking safer investments as stocks declined. The price of oil, meanwhile, fell amid expectations that a downturn would depress demand for energy.

The Fed lowered the target federal funds rate, or the interest banks charge one another for overnight loans, to 3.50 percent and the discount rate, the interest the Fed charges banks directly, to 4 percent..

It can take months for an interest rate cut to work its way through the economy. In the short term, it makes borrowing cheaper, but the billions of dollars in failed mortgages over the past year have made lenders wary of writing loans to almost anyone – consumers or corporations. And if consumers and companies aren’t spending more, an economic recovery can be slow.

The Dow was down 184.04, or 1.52 percent, at 11,915.26. The Dow was last below 12,000 in March 2007.

The broader Standard & Poor’s 500 index was off 22.70, or 1.71 percent, at 1,302.49, while the Nasdaq composite index fell 54.35, or 2.32 percent, to 2,285.67.

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