Stocks Fall as Recession Fears Top Bailout Hopes

The market capped an ugly week with fresh losses as a dismal U.S. jobs report trumped the House passage of the U.S. financial rescue plan.

The stock market got what it had been fervently hoping for Friday: The U.S. House of Representatives passed the revised version of the government's $700 billion financial rescue plan. And President Bush signed the bill into law shortly thereafter. An excuse for a nice rally in equities, right?

Wrong.

An old saying on Wall Street is "Buy the rumor, sell the fact." Markets had reacted positively when the plan was first announced two weeks ago, and had also moved higher on any subsequent perceptions of the success of the plan. Indexes cratered Monday on the House's initial rejection of the bill. They moved higher again Friday in anticipation of passage by the House, with the Dow industrials climbing over 300 points at one point during the session.

When the bill was finally passed Friday, by a 263 to 171 margin, the market had gotten exactly what it wanted. So, naturally, it was time to "sell the fact": Equity indexes moved solidly into negative territory in the final hour of trading Friday, capping a tumultuous week that included the stock market's worst one-day losses since 1987 on Monday.

It seems that even amid the bailout optimism, investors couldn't shake off some dismal economic news Friday. A report that that U.S. nonfarm payrolls fell 159,000 in September heightened speculation the Federal Reserve will cut interest rates soon in response to a weakening U.S. economy. There was even some market chatter about coordinated interest-rate cuts by global central banks.

"It appears that the financial markets will need further convincing before becoming optimistic that banks will start lending to each other again," says S&P MarketScope.

On Friday, the blue-chip Dow Jones industrial average fell 157.15 points, or 1.5%, to finish at 10,325.70. The broader S&P 500 index shed 15.05 points, or 1.35%, to end at 1,099.23. The tech-heavy Nasdaq composite index lost 29.33 points, or 1.48%, to 1,947.39. The declines followed Thursday's losses of 3.22% for the Dow, 4.03% for the S&P 500, and 4.48% for the Nasdaq.

On the New York Stock Exchange Friday, 20 stocks were lower in price for every 11 that declined. The ratio on the Nasdaq was 21-7 negative.

Gold and oil futures were lower as Friday's weak economic data suggest the U.S. may be heading into recession. Bonds, with the Treasury facing the need to issue more debt, were flat. The dollar index was little changed amid perceptions the European Central Bank and Bank of England will cut rates soon to combat recession.

The market's heightened unpredictability has many observers scratching their heads. "If I knew we'd get a week or two without any news, I'd favor the short side of the market," says S&P technical analyst Chris Burba. "But that's not the case. What happens if there's a concerted effort by global central banks to cut interest rates Monday morning?"

The House of Representatives voted Friday to approve the Bush administration's revised $700 billion financial markets rescue plan, four days after its rejection of the original bailout bill that sent the Dow down 777 points, it's biggest one-day point drop in history. The U.S. Senate approved the revised bill on Wednesday.

As the vote count implied, there was some objection among House members, mostly surrounding tax provisions in the bill and giving the Treasury secretary extraordinary power to buy bad assets.

Some are implying that the market's decline after the bailout bill was passed is a signal to the Fed that a rate cut is still wanted by the markets, says S&P MarketScope.

"The rescue bill may stop the recession from getting deeper and longer, but we're already in it," says S&P chief economist David Wyss.