Wall Street's initial enthusiasm about a $586 billion Chinese stimulus package fizzled Monday, as investors succumbed to anxieties about how U.S. companies will survive a severe pullback in spending.
Stocks got a short-lived boost from China's plans to boost its economy through a mix of spending, subsidies, looser credit policies and tax cuts. The package could benefit multinational companies with business in China such as General Electric Co. and Caterpillar Inc.
But Wall Street's optimism quickly waned, as it has tended to do since the mid-September downfall of Lehman Brothers Holdings Inc. and government takeover of the troubled insurance giant American International Group. Market participants realized that while China's stimulus is a positive sign that governments around the world are working to fix the global economy, the stimulus itself will likely have only a limited effect in the United States.
There was little news Monday to placate investors worried about the health of corporate America. AIG got more money from the U.S. government, but the nation's struggling automakers have yet to hear whether they, too, will get federal aid. And electronics retailer Circuit City Stores Inc. filed for bankruptcy protection.
With few signs of recovery in the economy, few investors are confident enough to make big bets on stocks, although they look cheap; the major indexes are down about 40 percent from their October 2007 peaks.
"They'd like to be optimistic, but individual investors are still very worried," said Hugh Johnson, chief investment officer of Johnson Illington Advisors. Uncertainty about the economic outlook is "likely to hold any recovery somewhat in check. We're arguably undervalued, so we can work our way higher. But it's not going to be with a lot of gusto."
The Dow Jones industrial average fell 73.27, or 0.82 percent, to 8,870.54, after rising by 215 points in early trading and tumbling by as many as 183. But trading was fairly orderly in the last hour — in recent weeks, stocks have often seen high volatility late in the day.
Broader indexes also ended lower. The Standard & Poor's 500 index fell 11.78, or 1.27 percent, to 919.21, and the Nasdaq composite index fell 30.66, or 1.86 percent, to 1,616.74.
The U.S. government said it would invest $40 billion into AIG, which also reported a nearly $25 billion third-quarter loss Monday. AIG, which got its first bailout in September, has so far received a total of $150 billion in government aid. The government's investment Monday helped the insurer's stock rise 26 cents, or 12 percent, to $2.37, but raised worries that problems in the financial sector might be worse than anticipated. Most bank shares fell.
On Friday, the major indexes rallied, but ended about 4 percent lower on the week after large mid-week losses.
"The fact is, we haven't been holding rallies very well," said Scott Fullman, director of derivatives investment strategy for WJB Capital Group. He said investors appeared be cashing out gains made Friday ahead of what's expected to be a dismal retail sales report this week, and the bond market's Veterans Day holiday Tuesday.
Anthony Conroy, managing director and head trader for BNY ConvergEx Group, said "we're in that bottoming process," but that trading is apt to be volatile at least until Nov. 15 — the last day that hedge funds and mutual funds can get calls for redemptions for 2008. Redemptions are when investors ask for their money back.
With stocks trading erratically, investors moved to the relative safety of government bonds.
The Treasury auctioned three-year Treasury notes for the first time since May 2007, and the auction saw strong buying. Meanwhile, the three-month Treasury bill's yield fell to 0.22 percent from 0.28 percent late Friday, and the yield on the benchmark 10-year Treasury note fell to 3.76 percent from 3.79 percent late Friday.
Lower yields indicate stronger demand.
Investors are also watching for developments with General Motors Corp., Chrysler and Ford Motor Co. after the automakers met with congressional leaders last week in hopes of securing financial help.
GM — one of the 30 companies that make up the Dow — fell $1, or 23 percent, to $3.36. Ford shed 9 cents, or 4.5 percent, to $1.93.
Democratic leaders in Congress on Saturday asked the Bush administration to provide more aid to the struggling auto industry, which is losing money and shedding jobs as sales have dropped to their lowest level in a quarter century. House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid said in a letter to Treasury Secretary Henry Paulson that the administration should consider expanding the $700 billion bailout program to include car companies.
On Monday, Circuit City filed for bankruptcy protection about a week after it said it would close 20 percent of its stores. The electronics retailer, based in Richmond, Virginia, has been struggling as nervous consumers spend less and credit has become tighter. Shares sank 15 cents, or 60 percent, to 10 cents.
In other corporate news, Tribune Co., the owner of the Los Angeles Times and Chicago Tribune, said it swung to a third-quarter loss of $121.6 million due to falling newspaper advertising sales.
Citigroup Inc. is in talks to acquire a regional bank to boost the bank's presence in areas it already operates, including the Northeast, California and Texas, according to a report in The Wall Street Journal. The report did not name a potential target. Citigroup shares fell 61 cents, or 5.2 percent, to $11.21.
The Russell 2000 index of smaller companies fell 12.69, or 2.51 percent, to 493.10.
Declining issues outnumbered advancers by about 2 to 1 on the New York Stock Exchange, where volume came to 1.14 billion shares.