msnbc.com news services
updated 10/20/2008 7:30:07 AM ET 2008-10-20T11:30:07

Wall Street closed Friday’s seesaw session with a sharp loss as strains in the credit markets showed signs of easing and investors sought bargains among stocks that were pounded lower in sell-offs earlier in the week. The Dow Jones industrials still ended a disastrous three-week losing streak with their best weekly gain in five and a half years.

For the week, the Dow unofficially gained 4.75 percent, while the S&P 500 unofficially rose 4.6 percent. It was the S&P's best week since February. The Nasdaq unofficially advanced 4.1 percent for the week — its best week since early August.

The market was uneasy, swinging between large gains and big losses, after the government said new home construction dropped by more than expected last month to the slowest pace since early 1991. But investors’ mood seemed to pick up briefly as lending rates for bank-to-bank loans eased, indicating some bank fears about not being repaid by borrowers is easing. Demand for safe-haven investments like Treasury bills also decreased.

The London interbank offered rate, or Libor, for three-month dollar loans fell to 4.41 percent from 4.50 percent on Thursday, the fifth consecutive day of declines.

“I think we’re beginning to get a slightly better feeling in the credit market,” said Peter Cardillo, chief market economist at Avalon Partners Inc., a New York brokerage house, pointing to the move in Libor. “I’m sure we’ll still have a strong bear grip to the market but I do believe the market was way oversold. I do believe we’ve made a bottom.”

It’s been an erratic week on Wall Street, with the Dow soaring 936 points on Monday, slipping moderately Tuesday, sinking 733 points Wednesday, and then rallying 401 Thursday. The volatility is not providing investors with much relief, but it is a welcome change from last week’s relentless plunge, during which the Dow logged its worst week ever and Wall Street lost about $2.4 trillion in shareholder wealth.

In a day that saw a 563-point swing on the Dow Jones industrial average, falling 261 points in the early going and then swinging into positive ground with a triple digit gain in early afternoon trading, the blue-chip index closed down 127.04 points, or 1.41 percent, to 8,852.22. The broader Standard & Poor’s 500-stock index fell 5.88, or 0.62 percent, to 940.55, while the Nasdaq composite index fell 6.42, or 0.37 percent, to 1,711.29.

“Sort of like a rubber bank that gets stretched too far, the markets have a tendency to bounce back once they’ve moved too far in one direction,” said Michael Sheldon, chief market strategist at RDM Financial Group in Westport, Conn.

He said signs of easing in the credit markets indicate that the government’s efforts to revive bank lending could be working and that investor pessimism could be easing.

“Just a couple of weeks ago many thought we were heading back to the Great Depression and heading off a cliff.”

The credit markets have been gradually improving after moves by governments around the world, particularly plans to buy stakes in private banks to boost their lending. Demand remains high for Treasury bills, regarded as the safest assets around, an indication that there is uncertainty lingering in the markets.

Major Market Indices

The three-month Treasury bill Friday yielded 0.85 percent, up from 0.47 percent on Thursday. That indicates a let-up in demand, though the yield has not surpassed 1 percent in more than a week.

The dollar was mixed against other major currencies, while gold prices fell.

David Dietze, president at Point View Financial Services Inc. in Summit, N.J., contends that much of the market’s whipsaw moves in the past month have come as hedge funds and mutual funds were forced to sell positions because some shareholders were cashing out.

“These hedge funds are getting hit by redemptions, their credit lines are being pulled and they are having to sell furiously,” he said. “Selling begets selling, which begets selling, which begets more selling.”

While Dietze sees risks for the economy, he questions whether the rapidity of the stock market’s retreat signals the pullback was overdone.

“We have a credit crunch which is morphing into a general recession and certainly a lot of the economic data points down but still, to come in this week and see the markets down 20 percent — basically a bear market within a bear market just this month — you wonder if there isn’t just this massive overreaction,” he said.

A rise in oil prices helped energy companies, some of which had weighed on the market earlier in the week as oil showed steep declines. Light, sweet crude rose $3.88 to $73.73 a barrel on the New York Mercantile Exchange. On Thursday, it sank to a 14-month low on worries about a deep global recession obliterating fuel demand.

Chesapeake Energy Corp. rose $2.66, or 14.5 percent, to $21.01, while XTO Energy Inc. rose $2.71, or 9.2 percent, to $32.31.

Materials companies also gained ground. AK Steel Holding Corp. rose 72 cents, or 5.7 percent, to $13.40, and miner Freeport-McMoRan Copper & Gold Inc. advanced $1.67, or 5 percent, to $35.06.

Health stocks generally rose. UnitedHealth Group Inc. advanced $1.79, or 7.9 percent, to $24.42, while Schering Plough Corp. rose 94 cents, or 6.7 percent, to $14.99.

Late Thursday, Google Inc. posted a 26 percent increase in third-quarter profit. Google rose $25.98, or 7.4 percent, to $379; early Thursday, the Internet company’s stock had fallen to a three-year low.

Economic readings that appeared to trouble the market early in the session seemed to lose their importance as investors looked to improvement in the credit markets.

The Commerce Department reported that housing starts fell more than 6 percent in September to an annual rate of 817,000 units. The figure is lower than the 880,000 units forecast by Wall Street economists surveyed by Thomson/IFR. Building permits also sank.

The report was yet another piece of evidence that the nation is struggling with a weak economy that, if the financial crisis is not solved, could weaken. President Bush on Friday said in a speech that the credit market — where many companies find funding for their operations — will take a while to thaw, but that Americans should be confident that it will.

“The market’s ability Thursday and today to rise in the face of very bad economic news is encouraging because it indicates that the extreme oversold levels that we’ve seen over the past few weeks may finally start to push the market higher as has typically happened throughout history,” said Sheldon.

Investor sentiment could also have received a boost from billionaire investor Warren Buffett, who wrote in The New York Times on Friday that he sees opportunity from the sell-off and that has been moving his personal investments from safe Treasuries into U.S. stocks.

Sheldon said Buffett’s comments were bound to draw attention because of his success in picking investments.

“Anytime he comes out with a statement commenting that the current environment is producing very attractive values investors are at least likely to take notice.”

Markets overseas were mostly higher Friday. In Asia, Hong Kong’s Hang Seng index dropped 4.44 percent to its lowest level in almost three years, but Japan’s Nikkei average rose 2.78 percent after a 11.4 percent loss Thursday. In Europe, Britain’s FTSE index rose 5.22 percent, Germany’s DAX index rose 3.43 percent, and France’s CAC-40 rose 4.68 percent.

The Associated Press and Reuters contributed to this report.

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