Stocks down at end of rocky ride

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NEW YORK (CNNMoney.com) -- Stocks ended lower Tuesday, but off the worst levels of the session as worries about a global economic slowdown eased and investors continued to sort through the implications of the Fed's emergency interest-rate cut.

The Dow Jones industrial average (INDU) lost about 128 points, recovering after opening the session down by more than 450 points. The blue-chip barometer ended at a 14-month low.

The broader S&P 500 (INX) index gave up 1.1 percent and ended at a more than 16-month low. The Nasdaq composite (COMP) lost 2 percent and ended at a 15-month low.

The Russell 2000 (RUT.X) small-cap index ended just 0.2 percent lower and closed at a more than two-year low. The Russell is considered to be in a bear market, having tumbled more than 20 percent off its highs from last summer.

Treasury prices rallied, lowering the corresponding yields as investors bet on the comparative safety of government debt. Oil prices fell and gold prices climbed.

After the close, Apple (AAPL, Fortune 500) issued fiscal second-quarter earnings and revenue guidance that is below forecasts. The company also reported higher fiscal first-quarter sales and earnings that topped estimates, but investors focused on the forecast, sending shares lower in extended-hours trade.

Also after the close, chipmaker Texas Instruments (TXN, Fortune 500) reported higher fourth-quarter earnings and weaker revenue. The chipmaker also issued a mostly in-line first-quarter forecast. Shares gained about 1 percent.

Coach (COH), Delta Air Lines (DAL, Fortune 500), Motorola (MOT, Fortune 500) and Pfizer (PFE, Fortune 500) are among the companies due to report earnings results Wednesday morning.

Stocks tumbled at the open Tuesday on worries that the United States is headed for a recession, if it isn't already in one, amid the credit and housing market crisis.

Global markets also tumbled Monday, while U.S. markets were closed for the Martin Luther King Jr. Day holiday.

That global market selloff prompted the Federal Reserve to hold an emergency telephone conference Monday night, and a decision to slash the fed funds rate was announced Tuesday.

After an initial knee-jerk negative reaction from investors, stocks managed to shore up some losses.

A recovery in international markets also helped U.S. stocks bounce off the session's lows.

"The markets opened sharply lower, but then cool heads prevailed," said Ram Kolluri, president at Global Investment Management.

"The large issues we are facing have not gone away and will continue to play out for some time," Kolluri said. "But I think the crisis scenario that has been floating around Wall Street has gotten overstretched."

Stocks have had a miserable start to 2008. Year-to-date, the Dow is down 9.8 percent, the S&P 500 is down 10.8 percent and the Nasdaq has fallen 13.6 percent.

One comfort had been bets that at least global growth was holding up and that it might offset the weakness in the U.S. economy. But the slumping global stock markets raised worries about slowing global growth as well.

The Fed's surprise cut: The central bank opted to cut the fed funds rate, a key overnight bank lending rate that affects all kinds of consumer loans, by three-quarters of a percentage point, or 75 basis points, to 3.50 percent. There are 100 basis points in one percentage point.

The central bank also cut the discount rate, which affects bank loans, by 75 basis points to 4 percent.

In its statement, the bank said it was making the move due to the weakening economic outlook and increased risks to growth.

This was the first emergency interest rate cut since September 2001, when the Fed cut interest rates in the midst of the recession and the panic following the 9/11 terrorist attacks. It was also the biggest interest rate cut since 1984.

"The Fed is saying they will do whatever is necessary to support the banking system," said Kolluri.

Wall Street still nervous: Stock investors have been looking for the Federal Reserve to either cut interest rates aggressively at next week's regularly scheduled meeting, or to hold an emergency meeting and cut rates early. Yet, the Fed's decision did little to soothe investors' fears and may have even exacerbated them.

"Even though this is what market participants have been screaming for, it may have shaken their confidence in the Fed's ability," said John Davidson, president and CEO at PartnerRe Asset Management.

"I think the inter-meeting cut frightened the market, making investors think that there must be something wrong if the Fed is going to do this, when it's not done very often in history," Davidson said.

Government help so far: The central bank has cut interest rates three previous times since September and has loaned $70 billion to banks in a series of overnight auctions.

Additionally, the Bush Administration and Congress are currently working on a fiscal stimulus plan to bring tax relief to consumers and businesses.

The combination of both monetary and fiscal stimulus should be the key to restoring investor confidence, but it takes time to get the money moving through the system, said Kim Caughey, senior equities analyst at Fort Pitt Capital Group.

She said that Tuesday's rate cut doesn't really take the pressure off the markets, because it doesn't fix the fundamental problem of growth. However, it is important in that it shows that Congress and the Fed are working together.

When the government's plan was announced at the end of last week, it "didn't feel like the Fed was working with legislators on a coordinated effort," Caughey said. "Now it feels more like that's the case."

Selling was broad based but improved from the morning, with 22 of 30 Dow stocks ending lower. The biggest gainer was Home Depot (HD, Fortune 500), which rose 7.4 percent.

One standout to the upside was Ambac Financial (ABK), which rallied 29 percent after the bond insurer reported a steep quarterly loss but said it hopes to find capital soon and for its insurance unit to regain its highest credit rating.

Market breadth was negative. On the New York Stock Exchange, losers beat winners three to two on 2.12 billion shares. On the Nasdaq, decliners beat advancers by almost two to one on 2.66 billion shares.

Seeking safety: Treasury prices surged in a classic flight-to-quality, with the yield on the 10-year note falling to 3.45 percent from 3.65 percent late Friday. Treasury markets were closed Monday for the holiday. Treasury prices and yields move in opposite directions.

In currency trading, the dollar fell versus the euro and gained against the yen.

U.S. light crude oil for February delivery fell 72 cents to settle at $90.57 a barrel on the New York Mercantile Exchange.

COMEX gold for February delivery rose $8.60 to settle at $890.30 an ounce.