Wall Street pulled off a stunning comeback Wednesday, surging higher in late trading and wiping out what looked to be yet another precipitous decline. The Dow Jones industrials, down more than 323 points in earlier trading, ended the day with an advance of just under 300 points, according to preliminary calculations.
While such volatility has become a hallmark of Wall Street's performance in recent months amid the ongoing housing and credit crisis, analysts saw some positive signs in the day's trading.
"There does come a point and time when the market itself recognizes that it got out of hand, and that is when bargain-hunters can come in," said Peter Cardillo, chief market economist at Avalon Partners.
The Fed's decision Tuesday to lower its federal funds rate by 0.75 percentage point to 3.5 percent has been met with some skepticism, but it gave intrepid investors Wednesday a reason to buy the severely dented stocks in the financial sector.
"You might say this is a belated reaction to what the Fed did this week, compounded by hopes for the Fed to do more next week," Cardillo said. Traders who bet on the Fed's target fed funds rate were pricing in on Wednesday a 100 percent chance of a 0.50 percentage-point cut by the central bank when it meets next week.
Rate cuts will eventually boost margins for banks and other lenders, which have been working to lower costs and boost cash levels through layoffs and stock sales. Those companies - like Citigroup Inc., Washington Mutual Inc. and Merrill Lynch - were the big winners Wednesday.
Moreover, the billions of dollars in mortgage-related losses suffered by the financial companies contributed to months of selling on Wall Street.
"The early leaders in a market recovery tend to be banks, REITs (real estate investment trusts) and homebuilders, as these are the groups that typically would benefit first from a turnaround. And those have been the market leaders this week," Goldman said. "What has happened is the Fed is flooding the system with liquidity and eventually we should see some traction in the economy. And stocks tend to respond first."
The Dow Jones industrial average rose 298.98, or 2.50 percent, to 12,270.17.
Broader stock indicators also surged. The Standard & Poor's 500 index rose 28.10, or 2.14 percent, to 1,338.60, while the Nasdaq composite index rose 24.14, or 1.05 percent, to 2,316.41.
Meanwhile, Top House leaders and Treasury Secretary Henry Paulson Wednesday tallied the cost of measures to jolt the U.S. economy out of its slump as the three sought a swift bipartisan deal on a recovery package that could move through Congress within weeks.
The leader of the House of Representatives, Speaker Nancy Pelosi, a Democrat, and Minority Leader John Boehner, a Republican, are taking the lead in congressional negotiations, with the centerpiece of the measure expected to be a tax rebate similar to, but bigger than, the $300-$600 checks sent out in the summer of 2001. The two huddled for a lengthy meeting with Paulson, President George W. Bush's point man on the package, and planned another gathering this afternoon.
"We looked at a lot of different options," Boehner told reporters, adding that the threesome reached "no conclusions or agreements." He said it would "require a great leap of faith" from both parties to find common ground.
Senior lawmakers in both parties met on Tuesday with Mr. Bush, who has proposed a stimulus plan worth about $150 billion. Combined with Iraq war costs and decreasing corporate tax revenues because of the economic slump, a package that size would more than double last year's deficit spending of $163 billion, according to new congressional budget estimates.
Mr. Bush expressed optimism that his administration can reach quick agreement with Congress.
"I believe we can find common ground to get something done that's big enough, effective enough so that an economy that is inherently strong gets a boost - to make sure that this uncertainty doesn't translate into more economic woes for our workers and small business people," Mr. Bush said Tuesday.
Pelosi, Boehner and Paulson are working on hammering out details. Senate leaders Harry Reid, a Democrat, and Mitch McConnell, a Republican, have agreed to stand back and let the House take the lead in the talks with the administration.
In the Senate, Reid said in an interview, "There are too many cooks in the kitchen. Send something over to us and we'll try to move it as quickly as we can."
Perhaps the most important obstacle to overcome is differences of opinion over who should receive rebate checks. Potential disagreements between the president and Congress: Democrats want rebates for working Americans who don't pay income taxes and no benefits for high-income earners, reports CBS News senior White House correspondent Bill Plante.
Thus far, talks have focused on setting the parameters of a bill combining rebates with Republican-sought tax breaks for businesses, as well as Democratic-backed help for the unemployed and those on food stamps.
Talks continued as the nonpartisan Congressional Budget Office, citing the weakening economy, estimated that the budget deficit for the current year will jump to about $250 billion. That figure does not reflect at least $100 billion in likely additional red ink from the deficit-financed economic stimulus measure.
Senate Budget Committee Chairman Kent Conrad, a Democrat, said the 2008 deficit would reach more than $350 billion once the costs of the impending stimulus bill are factored in.