Stocks slipped Tuesday afternoon after the Federal Reserve held a key short-term interest rate steady, disappointing some investors who were looking for a rate cut following the worst market selloff in seven years.
The Dow Jones industrial average (INDU) tumbled around 0.5% shortly after the Fed’s roughly 2:15 p.m. ET announcement. In the morning, the Dow briefly touched a fresh bear market trading low of 10,742.70, taking out the previous record from July.
The Standard & Poor’s 500 (SPX) index and the Nasdaq composite (COMP) both declined too.
Prior to the recent stock market bloodletting, Fed watchers had expected the central bank to hold the fed funds rate, a key interest rate, steady at 2%. But amid the bankruptcy of Lehman Brothers, buyout of Merrill Lynch and problems for AIG, Washington Mutual and other firms, Fed watchers were looking for a cut of at least a quarter-percentage point.
They didn’t get it.
Here’s a look at what was moving markets ahead of the Fed announcement:
Stocks had been lower in the morning, but turned positive near midday as the financial sector bounced back on reports that AIG could get some government assistance. AIG shares plunged as investors waited for news of the company’s fate, as it struggles to raise capital despite a series of debt rating downgrades.
However, there was no follow-up to those reports and the market seemed to lose momentum for a while. But by early afternoon, investors were again boosting stocks hit in Monday’s selloff.
Ahead of the meeting, the New York Federal Reserve said it would pump an additional $50 billion into the banking system to keep the liquidity flowing on top of the already scheduled $20 billion. The New York Fed enacts the central bank’s market operation.
Black Monday: Stocks tumbled Monday amid the largest financial crisis in years after Lehman Brothers (LEH, Fortune 500) filed for the biggest bankruptcy in history, Bank of America (BAC, Fortune 500) said it will buy Merrill Lynch (MER, Fortune 500) for $50 billion in stock and AIG (AIG, Fortune 500) slumped on fears that it can’t raise enough cash to stay afloat.
That selloff sent the Dow tumbling 504 points, or 4.4%. It was the Dow’s worst session since Sept. 17, 2001, when it plunged 684 points or 7.1% after the markets reopened after having been closed for four sessions in the aftermath of the attacks of 9/11. It left the Dow at its lowest point since July 14, 2006
Monday’s decline of 4.7% was also the S&P’s worst since Sept. 17, 2001, when it fell 4.9%. It left the S&P 500 at its lowest point since Oct. 27, 2005.
The Nasdaq lost 3.6%, its worst single-session percentage decline since March 24, 2003. It left the tech-fueled average at its lowest point since March 17 of this year.
But after that brutal selloff, trading Tuesday was pretty muted. The major gauges had been on both sides of unchanged throughout the session.
“The market reaction you are seeing today is a reality check,” said Jeffrey Dunham, chairman of Dunham & Associates Investment Counsel. “This is not the abyss we have fallen into and the economy and stock market are not going to crash.”
Dunham cited other rough periods in recent market history as examples, such as the recession and steep stock market selloff surrounding 9/11, that eventually led to the rally that started in 2003. He also pointed to the brutal 1998 and subsequent 1999 rally, as well as the Sept. 1987 selloff, when the Dow plunged 22% in a single day. However, stocks bounced back and ended the year higher, and also gained in 1988 and 1989.
AIG: Shares of the insurer and Dow component slipped 30%, after having fallen nearly 70% at the open and having recovered to a loss of just 15% near midday. AIG has been under pressure as it has struggled to raise as much as $75 billion to avoid collapse. Shares had plunged 61% Monday.
AIG (AIG, Fortune 500)’s cash scramble intensified after Fitch, S&P and Moody’s all cut the company’s debt ratings Monday night, which could make it have to post billions more in collateral. (Full story).
Washington Mutual: S&P cut the mortgage lender’s debt rating to junk status late Monday, reflecting the ongoing credit market meltdown and Washington Mutual (WM, Fortune 500)’s exposure to the housing market. WaMu shares gained 13% Tuesday afternoon after falling at the open and falling 27% during Monday’s session.
Reports suggested JPMorgan Chase could make a bid for the company and that seemed to help it recover, according to Briefing.com.
Goldman Sachs: The company reported a steep decline in earnings that nonetheless topped forecasts on weaker revenue that missed estimates. Shares slipped 3%, erasing bigger morning losses.
A number of other bank stocks bounced back, including Wells Fargo (WFC, Fortune 500), Citigroup (C, Fortune 500) and Merrill Lynch (MER, Fortune 500).
The Philadelphia Bank (BKX) sector index gained 4.5%.
Economy: The Consumer Price Index (CPI), a measure of consumer inflation, fell 0.1% in August after rising 0.8% in July, meeting forecasts. So-called core CPI, which strips out volatile food and energy prices, rose 0.2% in August, meeting forecasts and following a gain of 0.3% in the previous month.
Fuel prices: Oil prices plunged as investors continued to bet on a global economic slowdown amid Wall Street’s meltdown.
Oil prices fell $2.70 a barrel to $93.01, after ending the previous session at a six-month low.
Retail gas prices were higher overnight, according to the latest survey from AAA.
Other markets: In global trade, European markets fell in afternoon trade and Asian stocks ended lower.
Treasury prices soared as investors poured money into the relatively safe-haven. The rally sent the benchmark 10-year note tumbling to 3.29% from 3.39% late Monday. Earlier, the 10-year had fallen as low as 3.25%, a more than five-year low.
In currency trading, the dollar gained versus the euro and slipped against the yen.
COMEX gold for December delivery fell $6.50 to $780.50 an ounce