The Federal Reserve's decision Tuesday to lower its benchmark federal funds rate by 0.75 percentage point to 3.5 percent, while met with some skepticism, did give intrepid investors a reason to buy Wednesday.
"You might say this is a belated reaction to what the Fed did this week, compounded by hopes for the Fed to do more next week," said Peter Cardillo, chief market economist at Avalon Partners. Traders who bet on the Fed's target fed funds rate were pricing in on Wednesday a 100 percent chance of a 0.50 percentage-point cut by the central bank when it meets next Tuesday and Wednesday.
Rate cuts are designed to stimulate borrowing and, in turn, business activity and the overall economy. They also will eventually boost profit margins for banks and other lenders, which have been working to lower costs and raise cash levels through layoffs and stock sales after having lost billions of dollars to bad mortgages and mortgage-related investments. Those companies -- including Citigroup Inc., Washington Mutual Inc. and Merrill Lynch -- were the big winners Wednesday.
"The early leaders in a market recovery tend to be banks, REITs (real estate investment trusts) and homebuilders, as these are the groups that typically would benefit first from a turnaround. And those have been the market leaders this week," said Steve Goldman, chief market strategist at Weeden & Co. "What has happened is the Fed is flooding the system with liquidity and eventually we should see some traction in the economy. And stocks tend to respond first."
Still, analysts were mindful that in the past months, Wall Street has been known to soar one day and succumb the next, and that there are still many economic unknowns for the market to weather. And, given that stocks are so badly beaten down, bargain hunting played a part in Wednesday's turnaround. According to preliminary calculations, the Dow Jones industrial average rose 298.98, or 2.50 percent, to 12,270.17, having fallen as much as 323.29 earlier.
Before Wednesday's session, the Dow had fallen nearly 10 percent since the start of the year, and it was down more than 15 percent since its record close of 14,164.53 on Oct. 9.
Wednesday's swing from negative to positive territory of 631.86 points is the largest point swing since July 24, 2002, according to Dow Jones Indexes. The largest intraday point swing, a metric that Dow started calculating in July 1995, was a 721-point swing on April 14, 2000.
Broader stock indicators also surged Wednesday. The Standard & Poor's 500 index rose 28.10, or 2.14 percent, to 1,338.60, while the Nasdaq composite index rose 24.14, or 1.05 percent, to 2,316.41.
Advancing issues were ahead of decliners by about 3 to 1 on the New York Stock Exchange, where volume came to a heavy 2.83 billion shares.
Bond prices turned lower as stocks rebounded. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell in earlier trading but then recovered to 3.55 percent, up from 3.41 percent late Tuesday.
At its lowest point Tuesday, the Dow was 17.9 percent below its October closing high, meaning that the stock market has come perilously close to the bear market threshold of 20 percent. It's unclear whether Wall Street will indeed keep falling and officially enter a bear period, or whether it is bottoming out.
Buying, like selling, can feed on itself and investors may go into the market to be sure they don't miss out on a rally. What needs to be seen is whether these gains will easily be knocked down again.
"Volatility is certainly the norm now and not the exception," said Art Hogan, chief market strategist at Jefferies & Co. "We have had 14 trading days so far this year and only two of them have been without a triple-digit swing (in the Dow). Three of those days have had 300-point swings."
Wall Street faces several months of uncertainty, with the bulk of fourth-quarter earnings reports still to come and with economic reports likely to be disappointing. When it's more clear that companies and consumers are spending freely, investors might relax.
However, with consumers burdened by debt and in the process of cutting back their spending, it's impossible to predict when that relief will come.
The dollar was mixed against other major currencies Wednesday, while gold prices fell.
Battered small-cap companies -- which rely heavily on borrowing to grow their businesses -- got a lift Wednesday. The Russell 2000 index of smaller companies rose 21.86, or 3.26 percent, to 693.43.
Before the turnaround in U.S. stocks, European stocks closed sharply lower on economic worries and escalating uncertainty about the European Central Bank's willingness to lower rates. Britain's FTSE 100 closed down 2.28 percent, Germany's DAX index fell 4.88 percent, and France's CAC-40 fell 4.25 percent.
In earlier Asian trading, Japan's Nikkei stock average closed up 2.04 percent after falling 5.7 percent Tuesday. Similarly, Hong Kong's Hang Seng index surged 10.72 percent -- its biggest gain in 10 years -- after falling 13.7 percent in the previous two sessions.
