Although Wall Street rallied smartly after the federal bailout of Citigroup Inc., investors burned during a 15-month market plunge probably don't expect this advance to be sustained any more than the upward blips that followed other government rescues of financial companies.
The Dow Jones industrial average surged nearly 400 points after Citigroup's bailout was announced Monday, but analysts warned that the market's huge sense of relief will likely soon be erased by investors' ongoing worries about the nation's multiplying economic problems — and by any news of other financial institutions in need of rescues like the ones given Citigroup and insurer American International Group Ltd.
"There's never been a bailout like the one we've seen in the past few months, people are still wondering how bad it's going to be even if they get good news" like the Citigroup bailout, said Chris Johnson, president of Johnson Research Group. "This is a once bitten, twice shy market, and it has been bitten so many times it isn't funny."
Monday's advance, which followed a 494-point gain in the Dow on Friday, was notable in that it gave Wall Street its first two-day rally since Oct. 30-31. The fact that the market has been unable to sustain its gains over the course of the 15-month credit crisis — and, in particular, during the last two volatile months — is proof that any good news or sentiment is highly vulnerable amid the ongoing stream of negative economic and corporate news.
The market has had varying reactions to a series of major events since the financial crisis began:
- Bear Stearns Cos. In March, Wall Street at first plunged when investors got their first chance to react to JPMorgan Chase & Co.'s fire-sale acquisition of the nation's fifth-largest investment bank. However, that gave way to some optimism that the government, which orchestrated the deal, was being vigilant about making sure Wall Street firms did not completely collapse. The Dow, which tumbled 200 points during the session, finished higher by about 21. The optimism continued through the week, with the Dow picking up 410.
- Fannie Mae/Freddie Mac. In September, stocks rallied after the government bailed out Fannie Mae and Freddie Mac, as many traders felt the moves signaled that the financial and housing sectors would better recover. The announcement that the Treasury Department was seizing control of the companies, which own or back about half the nation's mortgage debt, eased investors' worries that the pair would be felled by a spike in bad mortgage debt. The good news didn't last long — speculation a few days later about Lehman Brothers Holdings Inc.'s fate sent stocks sharply lower for the week.
- Lehman Brothers. In September, there was no bailout for Lehman, which buckled under the weight of bad mortgage-related assets, leading to the largest U.S. bankruptcy on record. The Dow lost 500 points in its worst slide since the September 2001 terrorists attacks, and investors recoiled at a shakeup of the financial industry that also saw Bank of America Corp. announcing it would acquire Merrill Lynch & Co.; that move delivered Merrill a lifeline so it could avoid the same fate as Lehman. But by the week's end, stocks had another extraordinary rally as investors stormed back into the market on relief that the government plans to restore calm to the financial system through a massive bailout package. The Dow finished the week up 410.
- American International Group Inc. In September, the government's rescue of insurer AIG failed to restore investors' confidence in banking stocks. Investors were concerned that the financial system was growing no closer to stability, and that other companies might also require bailouts. The Dow plunged 450 points, and investors quickly fled into safe-haven investments such as Treasury bills. Again, the sentiment did not linger. By the end of the week, stocks recovered their losses and ended higher as the government began finalizing its plans to unveil a $700 financial bailout plan. The Dow finished up 33 points.
- Federal government's bailout plan. In October, congressional approval of the government's financial rescue plan did little to lift the markets' concerns about the economy. The Dow fell 157 points in a volatile session and went on to lose 817 points for the week.
The Citigroup bailout has given investors hope that the government is being aggressive in trying to support the economy, and that the economic downturn might not last as long as some feared.
That pushed oil prices 9 percent higher Monday, above $54 a barrel, on hope that businesses and consumers will use more energy if the economy is in better shape. The surge in the stock market persuaded skittish investors to take some chances and pull their money out of the safety of government bonds, and that pushed Treasurys sharply lower.
The reason for the markets' reaction to a given news event such as a bailout may depend on whether investors have a pessimistic or optimistic bias at the time.
Alexander Paris, an economist and market analyst for Chicago-based Barrington Research, said investors sometimes see "bad news as bad news, and other times, bad news as good news."
"I know it makes no sense, like there's a few people on Wall Street who get together and say 'let's get bearish today or let's feel bullish'" he said. "People reacted to the Citi bailout because they think that's the way they ought to react, that it is a positive. But, who is to say next time around that traders might be nervous the bailout is another sign of hopelessness."