Wall Street stages late-day recovery

Wall Street staged a late-day recovery Wednesday, with stocks bouncing back from a triple-digit slump earlier in the day that was triggered by investors’ concerns about rising interest rates and ongoing turmoil in Iraq.

Earlier in the day, stocks were pummeled by continued concerns over rising interest rates and accelerating inflation, analysts said. “Higher rates mean lower P/E ratios and the stock market doesn’t believe future earnings growth will be strong enough to offset that,” Barton Biggs, global investment strategist at Morgan Stanley, told CNBC.

But Biggs remained optimistic on the stock market:

"This market is as oversold as it has been in the last 20 years and I think we will have a violent, oversold rally out of this thing some time in the next couple of days," he said. His comments, which came at about 2 p.m. ET, coincided with the start of the market’s late-day recovery.

Worries about interest rates, inflation, the situation in Iraq and uncertainty about what impact it might have on the presidential race, and the psychological impact of seeing the Dow Jones industrial average drop well below 10,000 made for an “ugly” day on the market, said Bill Groenveld, head trader for vFinance Investments.

“Why should the buyers step up here now?” asked Groenveld. “Why try to catch a falling knife? They have much more room to push down. And I don’t see as many fund managers or institutional investors being pro-active in a rising rate environment. ... Everybody is in a really reactive stage right now.”

Despite sinking to a loss of 167 points shortly before 2 p.m. ET, the Dow Jones industrial average worked off its losses during the last two hours of trading and closed Wednesday with a gain of 25.69 points, or 0.3 percent, while the broader Standard & Poor’s 500-stock index finished with a gain of 1.83 points, or 0.2 percent.

The tech-rich Nasdaq composite index, which had borne the brunt of the stock market’s sell off earlier in the day, declining over 2.5 percent by mid-session, finished with a loss of just 5.76 points, or 0.3 percent.

Although the major indexes had mostly recovered by the end of the session, low volume suggests many large investors are staying out of the market. At least some may be awaiting key inflation data due — the producer and consumer price indexes — later this week.

Analysts said worries that the Federal Reserve will soon raise a key short-term interest rate, currently at a four-decade low, were fanned by rising crude oil prices, which burst to new 13-year highs Wednesday amid concerns about global supply.

A surge in prices at the gasoline pump could crimp consumer spending, which accounts for about two-thirds of economic activity. They could also lead to inflationary pressure noted Peter Cardillo, chief investment officer at New York retail brokerage S.W. Bach.

“If oil prices continue to move higher and stay there for a sustained period of time it will have an inflationary impact and there’s a fear that the Fed will have to raise rates to combat that inflation,” Cardillo said. “That’s certainly a negative for the equity market, not only in terms of higher interest rates, but also in terms of slower economic activity.”

Cardillo added that rising oil prices strengthens the prevailing view on Wall Street that the Fed will raise rates again at its next meeting in late-June. “I can’t see how the Fed can’t take this into consideration,” he said.

Some professional investors also said growing anxiety over the situation in Iraq following the beheading of an American civilian, and the controversy over U.S. treatment of Iraqi detainees in a Baghdad prison, was weighing on investor sentiment.

Despite the Dow’s late-day surge, shares of Dow component Altria Group slumped 6.7 percent to $49.80 after the Florida Supreme Court dealt the tobacco industry a legal setback.

Cisco Systems pulled down the technology-heavy Nasdaq, as inventory concerns and mild disappointment with the company’s outlook for its current quarter overshadowed a jump in quarterly earnings.

The world’s largest network equipment maker also said it added 200 jobs during the quarter, and plans to add another 1,000 positions by the end of the year. Cisco’s stock price was down 1.3 percent at $21.96.

Qualcomm’s share price fell 1.3 percent to $63.90, even though the wireless communications firm raised its forecast for the quarter and the year on improved orders for its mobile phone chips.

After the close, Dow component and media giant Walt Disney said strong DVD sales and increased theme park attendance boosted profits in the second quarter. Its share price finished the regular session flat at $23.

On the economic front, the government said Wednesday U.S. trade deficit swelled to an all-time high of $46 billion in March, reflecting a growing appetite for foreign-made goods. Sales of U.S. goods to other countries also climbed to their highest level on record — encouraging news for domestic manufacturers and exporters.

Advancing issues slightly outnumbered decliners on the New York Stock Exchange.

Overseas, Japan’s Nikkei finished 2.3 percent higher Wednesday. In Europe, France’s CAC-40 lost 1.2 percent, Britain’s FTSE 100 shed 0.9 percent and Germany’s DAX index sank 1.9 percent.