Wall Street received the interest rate cut it wanted, but still turned in a baffling late-day performance Wednesday, shooting higher and then skidding lower in the very last minutes of trading as some investors rushed to cash in profits after the market’s big advance. The major indexes ended the day mixed, with the Dow Jones industrials falling 74 points — only the third time in October that the blue chips had just a double-digit close.
Analysts were divided over why the market turned around so abruptly. Some cited reports of a lackluster profit forecast at General Electric Co. — a Dow component that dropped nearly 4 percent from its late-session high — and others contended investors were simply looking to cash in gains after the Federal Reserve’s decision to lower its fed funds rate by a half-point to 1 percent.
“It was a panic sell in the last two minutes,” said Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams in New York, referring to reports that GE was aiming at 2009 profits to be little changed from 2008. The reports were subsequently called into question, and a GE spokesman said the statements were taken out of context.
The market waffled while it was still digesting the Fed’s economic assessment statement that accompanied the rate cut, but then advanced for most of the final hour of trading, and until shortly before the close, it looked like Wall Street would extend its huge rally from Tuesday, which sent the Dow Jones industrials shooting up nearly 900 points.
Policymakers spelled out a weakening of economic conditions in the U.S. and abroad, citing first a drop in spending by American consumers. The Fed also reiterated that it expects government steps, including its own efforts to increase liquidity, to improve credit market conditions and the economy over time.
Analysts said the market seemed to settle on an upbeat interpretation of the Fed’s view.
Bruce McCain, chief investment strategist at Key Private Bank in Cleveland, said the Fed’s overall tone conveyed it regards the economic troubles as somewhat typical of a weak economy and not the kind of intractable problems that signal a deep recession is imminent.
“They more or less indicated elevated concerns about the economy but nothing in it suggests any real panic but that this is just one more step in their program to restore the financial system to complete functioning.”
But the last hour of trading on Wall Street over the past month has seen turnarounds in sentiment as well as prices, and the late-session volatility that has become the norm was in force again Wednesday.
“We set ourselves up in the last hour with a golden opportunity to lock in profits,” said Ryan Larson, senior equity trader at Voyageur Asset Management, a subsidiary of RBC Dain Rauscher.
He said that late in the day, many investors were putting a more downbeat spin on the Fed’s statement, which had indicated policymakers are willing to lower the fed funds rate below 1 percent if necessary. Traders started thinking, “if they’re willing to go under 1 percent, there must be serious problems that we don’t know about yet,” Larson said.
The Dow was up as much as 298 points in the last quarter hour of the session, giving it a two-day gain of more than 1,187 points, when it began to slide. It closed down 74.16, or 0.82 percent, at 8,990.96.
Broader stock indicators were mixed. The S&P 500 index fell 10.42, or 1.11 percent, to 930.09, and the Nasdaq composite index advanced 7.74, or 0.47 percent, to 1,657.21.
Advancers outnumbered decliners by about 2 to 1 on moderate volume of 1.62 billion shares on the New York Stock Exchange.
The credit markets had a lukewarm response to the Fed move. The yield on the three-month Treasury bill, regarded as the safest investment around and an indicator of investor sentiment, fell to 0.55 percent from 0.74 percent Tuesday. A drop in yield indicates an increase in demand. Meanwhile, the yield on the benchmark 10-year Treasury note rose to 3.86 percent from 3.84 percent late Tuesday.
It was clear from Wednesday’s trading that Wall Street is nowhere near moving away from the volatility that has devasted stock prices this month. And many investors are hesitant to re-enter the market after being hit hard — even with Tuesday’s jump, the three major stock indexes are still down more than 30 percent for the year, battered since last month’s freeze-up of the credit markets. The troubles with the credit markets have made it harder and more expensive for businesses and consumers to get loans.
While signs have emerged that the government action to revive credit markets is starting to work, investors remain skittish over the effects of the prolonged credit freeze on the economy, which relies on lending to feed growth.
Investors are hoping the latest rate cut will complement the government’s still-unfolding efforts to aid the commercial paper market, where companies turn for short-term loans, and the banks themselves. The Treasury this week is investing directly in banks, hoping the cash will make them more likely to issue loans.
Wall Street’s rally Tuesday helped lift trading in most markets overseas. Japan’s Nikkei stock average jumped 7.74 percent. Britain’s FTSE 100 rose 8.05 percent, Germany’s DAX index slipped 0.31 percent, and France’s CAC-40 rose 9.23 percent.