Dow muscles back after rough day
Broad market remains deep in the red, while the blue-chip average manages to end in positive territory as investors mull Bear Stearns' sale and Fed's emergency action.
NEW YORK (CNNMoney.com) -- Stocks cut losses and the Dow managed to end higher Monday, at the end of a tough session in which investors tried to put in perspective Bear Stearns' fire sale and emergency moves by the Federal Reserve.
Bond prices surged, lowering corresponding yields, as investors sought the comparative safety of government debt. The dollar plunged to a 13-year low versus the yen and hit another all-time low versus the euro.
The Dow Jones industrial average (INDU) added 0.2% or 20 points, after having been down almost 200 points at its lows of the session. The broader Standard & Poor's 500 (SPX) index lost 0.9%, and the Nasdaq composite (COMP) fell 1.6%.
Stocks had seesawed in the afternoon, with investors trying to come to terms with what the Bear Stearns deal and new aggressive Fed action means amid the credit and housing market crises.
Equities managed to close off the lows of the session, which was a positive, but "this is the worst looking Dow gain I've ever seen," said Donald Selkin, director of research at Joseph Stevens. He noted that JP Morgan Chase and a few defensive stocks such as Merck and Johnson & Johnson were largely responsible for the Dow's advance. Meanwhile, the broader market was soundly lower, with decliners beating advancers 5 to 1 on the New York Stock Exchange.
Selkin said that falling oil prices, a recovery in some of the financial stocks that had been hit hardest in the morning and a renewed focus on Tuesday's Fed meeting were among the factors that helped stocks end off the lows.
The Federal Reserve is expected to cut the fed funds rate, a key overnight consumer lending rate, by a full percentage point when it meets Tuesday. (For details, click here.)
Additionally, stock losses were contained since stocks have already slumped so sharply since the October highs. The Dow and S&P 500 closed at all-time records on Oct. 9. Since then, the Dow has erased 15.5% and the S&P 500 has lost 18.4%, as of Monday's close. The Nasdaq is down nearly 24% since hitting its recent high on Oct. 31, which was not an all-time record.
George Ball, chairman of Sanders Morris Harris Group, said that from an historic perspective, this is the greatest test of the financial markets he's seen in 40 years on Wall Street.
"I'm optimistic as to the ultimate outcome, but the failure of a major bank is something that goes beyond the isolated event and creates a great deal of systemic risk for the financial markets," Ball said.
Ball said that the stock market reaction Monday was one of "watchful waiting."
"The action by the Federal Reserve to prevent the assets and liabilities of Bear Stearns from being dumped on already nervous equity markets have clearly avoided an immediate calamity," he said. "However, investors are waiting to see if there are other dominos to fall, or if this one act will be enough to stem the crisis in lender confidence which is really underlying the topical issues."
Bear Stearns. Stocks tumbled Friday on news that Bear Stearns needed emergency funding to avoid a collapse, and fears about the financial sector deepened over the weekend.
On Sunday, JP Morgan Chase agreed to buy Bear for just $2 a share, or $236 million. That's less than 4% of Bear Stearns' value at the close of trading on Thursday. On Friday, Bear shares plunged 47% to close at $30 a share. One year ago, the stock was worth nearly $160. (Full story).
Bear Stearns (BSC, Fortune 500) shares tumbled 84% to less than $4 a share on Monday. But JPMorgan Chase (JPM, Fortune 500), a Dow component, rallied 3.8%.
Federal regulators accelerated the Bear deal-approval process and the Federal Reserve provided $30 billion in funding, the latest in the central bank's series of drastic steps to protect the financial markets amid the housing and credit crises.
Also on Sunday, the Fed cut the discount rate, a short-term bank lending rate, to 3.25% from 3.5%, as a means of making more cash available to strapped banks. The move occurred just two days ahead of the Fed's regularly scheduled policy meeting.
The central bank is expected to cut the fed funds rate, a consumer lending rate, by a full percentage point at that meeting, traders estimate, with some even calling for a cut of 1.25 percentage points. The fed funds rate currently stands at 3%. But some market watchers feel that additional rate cuts won't be enough to calm markets. (Full story).
The Fed also announced Sunday it had created another lending facility that allows big Wall Street firms access to short-term funding. (Full story).
David Doll, CEO of Kanaly Trust said that the developments "continue to show that the hand played by the Federal Reserve remains very active, with an unprecedented level of involvement in financial markets."
He said that the one downside to this is that it is forestalling an inevitable bigger fallout in stocks and financial markets. "We're obviously in a bear market an stocks are in a process of finding the bottom," Doll said. "That process has been elongated by all the Fed action."
A variety of financial stocks tumbled as investors wondered which company would be next to face a fate similar to that of Bear Stearns, with current speculation turning to Lehman Brothers. Lehman shares plunged 23%, erasing bigger losses from earlier in the session as a number of analysts questioned whether the company was really in danger of seeing a similar fate as Bear Stearns. (Full story).
Market breadth was negative. On the New York Stock Exchange, decliners beat advancers nearly 5 to 1 on volume of 2 billion shares. On the Nasdaq, losers topped winners 3 to 1 on volume of 2.39 billion shares.
Other markets. U.S. light crude oil for April delivery fell $4.53 to settle at $105.68 a barrel on the New York Mercantile Exchange after touching an all-time high of $111.80 in electronic trading.
COMEX gold for April delivery added $7 to settle at $1,006.50 an ounce after hitting an all-time high of $1,033.90 an ounce earlier.
Treasury prices rallied, lowering the yield on the benchmark 10-year note to 3.30% from 3.44% late Friday. Bond prices and yields move in opposite directions.
In currency trading, the dollar fell to a fresh all-time low versus the euro and again touched a more than 12-year low against the yen. 
