Wall Street Closes Sharply Lower Following Volatile Trading Day

Wed. October 08, 2008; Posted: 04:51 PM

(RTTNews) - Wall Street ended a volatile session sharply lower on Wednesday, as investors digested an emergency rate cut by the Federal Reserve in a combined effort from several other central banks. While the cut spurred some buying interest throughout the session, concerns remain about the health of the global economy.

The major averages saw notable selling pressure in late day trading, with each setting five-year closing lows. The Dow closed down 189.01 points or 2 percent at 9,258.10, the Nasdaq closed down 14.55 points or 0.8 percent at 1,740.33 and the S&P 500 closed down 11.29 points or 1.1 percent at 984.94.

Stepping up already intense efforts to protect the global economy from the crisis afflicting the financial markets, six of the world's most influential central banks announced Wednesday that they were conducting a coordinated reduction in interest rates. The largest coordinated central bank action in history involved the central banks in the U.S., Canada, the Euro-zone, the UK, Switzerland and Sweden, each of which lowered its benchmark interest rate by half a percentage point.

In the U.S., the Federal Reserve cut its benchmark interest rate to 1.5 percent - its lowest level since the summer of 2004. The move came well before the Fed's regular-scheduled meeting on interest rates - set to take place near the end of the month. Ben Bernanke, chairman of the central bank, hinted on Tuesday that a rate cut could come in the near future.

The action represented a new level of cooperation between central banks, which up until now have changed interest rates based on the needs of their individual economies. Many of the central banks have acted together in the past to provide liquidity for markets, but Wednesday's announcement was the first time such a large group of major central banks enacted a coordinated rate change.

Meanwhile, pending home sales unexpectedly showed a substantial increase in the month of August, according to a report released by the National Association of Realtors on Wednesday, with the pending home sales index rising to its highest level in over a year.

In a note to clients, Peter Boockvar, equity strategist at Miller Tabak stated that while inventories "are still a ways away from being worked down," a big drop in home prices has "brought out the foreclosure buyers and proves that lower prices while painful right now, are needed to increase demand."

Lawrence Yun, NAR chief economist, said, "What we're seeing is the momentum of people taking advantage of low home prices, with pending home sales up strongly in California, Nevada, Arizona, Florida, Rhode Island and the Washington, D.C., region."

Commenting on the outlook for the broader economy, Yun forecast a recession, saying he expects GDP to contract in the fourth quarter of 2008 and the first quarter of 2009. Nonetheless, he expects growth in the latter part of 2009 as the housing market begins a steady improvement.

While the economic news was somewhat encouraging, prompting investors to look for bargains at times, traders remain worried over the health of the economy, and they are waiting anxiously for corporations to report their quarterly earnings.

Alcoa (AA | Quote | Chart | News | PowerRating) unofficially kicked off earnings season after the markets closed on Tuesday. The aluminum producer reported disappointing quarterly results, raising concerns about the upcoming season.

In overseas trading, the major Asian markets showed substantial weakness on Wednesday in reaction to the mayhem on Wall Street overnight. After seeing some volatility over the course of the trading day, the major European markets also ended the session sharply lower.

Meanwhile, treasuries ended the day sharply lower. The benchmark ten-year note moved to the downside soon after the start of trading, and it continued lower for most of the day. Subsequently, the yield on the ten-year note closed up 20.9 basis points at 3.715 percent.

Brokerage stocks turned in some of the worst performances. The Amex Securities Broker/Dealer Index fell 4.7 percent, adding to losses posted in the previous four sessions. With the decline, the index set a five-year closing low.

Legg Mason (LM | Quote | Chart | News | PowerRating) was one of the biggest decliners in the brokerage sector. The stock fell 13 percent, adding to a steep loss posted in the previous session. On Tuesday, Moody's Investors Service downgraded Legg Mason's senior debt rating to A3 due to financial pressures.

Despite a drop in oil prices, airline stocks ended the sessions sharply lower as well. The Amex Airline Index fell 4 percent, extending a recent downtrend. With the decline, the index set another two-month closing low.

Other stocks that showed considerable weakness include health insurance, telecommunication and bank stocks. The Morgan Stanley Healthcare Payor Index closed down 3.8 percent, the Amex North American Telecommunications Index fell 3.3 percent and the KBW Bank Index ended the session 2.9 percent lower.

On the other hand, gold stocks turned in some of the best performances, with the price of the precious metal ending the day up more than $24 an ounce. The Amex Gold Bugs Index closed up 18.7 percent, climbing off of a two-year closing low set in the previous session.

Within the gold sector, Rangold Resources (GOLD | Quote | Chart | News | PowerRating) was upgraded to a Buy rating by an analyst at Citigroup, sending the stock sharply higher. Shares of the mining company gained 22.8 percent, reversing the loss posted in the previous session.

Boosted by the better than expected report on pending home sales, housing stocks also saw significant buying interest. The Philadelphia Housing Index climbed 1.3 percent, ending a four-day slide.

Chemical, oil service and railroad stocks ended the day higher as well. The S&P Chemical Index closed up 2.5 percent, the Philadelphia Oil Service Index closed up 1 percent and the Dow Jones Railroad Index closed up 0.7 percent.

Looking ahead to Thursday, the markets may be swayed when the Labor Department releases its weekly report on initial jobless claims. Economists expect the report to show a modest decline in claims to 475,000 from 497,000 in the week ended September 27th. Later in the morning, the Department of Commerce will release its monthly report on wholesale trade.

In the afternoon, Minneapolis Federal Reserve President Gary Stern, who is a FOMC voting member, will be in Minneapolis to speak about financial shock repercussions.

Meanwhile, the short selling ban on certain financial companies is set to expire Wednesday night. The markets may see some volatility on Thursday if the ban is not extended.

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