Stocks surge as Feds act
Wall Street rallies as Washington moves to stem the financial crisis. The Dow jumps 780 points in 2 days - best run since 2000.
NEW YORK (CNNMoney.com) -- Stocks rallied Friday, with the Dow rising 369 points, as the government's plan to help rescue banks from toxic mortgage debt soothed investors at the end of a gut-churning week on Wall Street.
Treasury prices plunged and gold prices tumbled as investors bailed out of safe-haven plays and poured money into equities, reversing the flight-to-safety trend of earlier in the week. Oil rallied more than $6 a barrel. The dollar jumped nearly 2% versus the yen, but fell versus the euro.
The Dow Jones industrial average (INDU) added nearly 369 points, or 3.3%.
Including Thursday's big rally, the Dow's two-session advance was 779 points, the biggest since March 2000, according to Dow Jones. On a percentage basis, the two-session advance of 7.3% was the biggest since October 2002.
The Standard & Poor's 500 (SPX) index jumped 4%. The Nasdaq composite (COMP) gained 3.4%.
Small cap stocks jumped too, with the Russell 2000 (RUT) up 4.1%.
The economy still has work to do, and the problems in financials have not disappeared as a result of today's announcements, but confidence has been restored, said Fred Dickson, chief market strategist at D.A. Davidson & Co.
"It's a seminal moment in the crisis," Dickson said. "It doesn't mean we're out of the crisis, but the net impact is that people will feel more comfortable investing again."
Friday's session capped a stunningly volatile week on Wall Street, in which, for example, the Dow's daily ricocheting between lows and highs added up to a more than 2800-point run. However, for the week, the Dow closed down less than 34 points.
Looking forward, the stock market will be stronger for a while then it otherwise would be, but this doesn't mean the bear market is over, said Ryan Atkinson, market analyst at Balestra Capital.
"Once investors absorb all of this, they will realize that while this keeps the banking system from imploding, which is good, it doesn't change the broader issues," Atkinson said.
Those issues include the weak labor market, sluggish consumer spending, and the slowing global economy.
(How effective will the plan be?
Bailout plan: The federal government is establishing a plan that will allow banks to get soured mortgage-related assets off their balance sheets, a move seen as key to stemming the 15-month-old credit crunch.
Treasury Secretary Henry Paulson outlined the plan Friday, saying that it would likely cost "hundreds of billions of dollars" and that it needs to be substantial enough to have maximum impact. (Full story)
"We've figured out a plan that could restore health to the financial system," said Phil Dow, director of equity research at RBC Wealth Management.
He cautioned that it doesn't mean stocks are now set to rise, but that it does change the fundamentals of the financial services sector, which is important.
"This may prove to be a big watershed for U.S. financials because it could allow the banks to benefit again from rising stock prices and to clear their balance sheets," Dow said.
Money markets: As part of the broad effort to restore stability, the Treasury Department and Fed both announced steps Friday to shore up the nation's money market fund industry, which has stumbled this week amid the financial market crisis. (Full story).
The Treasury said it will insure up to $50 billion in money-market fund investments at companies that pay a fee to participate in the program. The yearlong initiative guarantees that the funds' value will not fall below the standard $1 a share.
Dickson said this is perhaps the most significant development announced Friday, in that it insures that funds will be available to millions of depositors. "The number one fear for investors has been 'With banks going under, where do I put my money?'" he said. "This addresses that."
At the same time, the Fed will lend an unlimited amount of money to banks to buy asset-backed paper - short-term debt issued by corporations - from money market funds. These holdings have come under pressure as investors cashed in a record $169 billion in money market assets in the past week.
Short-selling ban: And in an attempt to limit the plunge in financial stocks, the Securities and Exchange Commission is temporarily banning the short-selling of nearly 800 financial stocks.
Short-selling is a process in which traders place bets that a stock will fall. Shorting has been seen as partly responsible for the accelerated bloodletting in financial stocks this summer. (Full story).
The U.K. took similar steps to limit short-selling Thursday.
The short-selling ban is a good short-term means of helping finance companies pull out of their slump, said Art Hogan, chief market strategist at Jefferies & Co.
The ban also probably helped fuel Friday's advance by causing all the short-sellers to jump in and buy shares back.
(But for a look at why the ban could be a mistake longer term, click here.)
On a broad level, the day's announcements are key to helping restore stability. "Whether it's tangible or emotional, we're getting markets back up to where they should be," Hogan said.
Financial crisis: The developments were critical at the end of an extraordinary week that began with Lehman Brothers (LEH, Fortune 500) filing the biggest bankruptcy in history.
Also this week: Merrill Lynch (MER, Fortune 500) was bought by Bank of America (BAC, Fortune 500) in a $50 billion stock deal; AIG (AIG, Fortune 500) narrowly avoided bankruptcy after the Fed bailed it out with an $85 billion bridge loan, and speculation swirled about the fates of Morgan Stanley (MS, Fortune 500), Goldman Sachs (GS, Fortune 500) and Washington Mutual (WM, Fortune 500).
Friday's news seemed to cool fears, giving a boost to all the companies that were at the source of the panic. Merrill rose 34%, Bank of America gained 23%, AIG rose 43%, Morgan rose 21%, Goldman rose 20% and WaMu rose 42%.
Among other financial sector gainers, Citigroup (C, Fortune 500) jumped 24%. The company is reportedly considering making a bid for WaMu, according to the Wall Street Journal.
Wachovia (WB, Fortune 500), rumored to be in talks with Morgan Stanley, gained 29%.JP Morgan Chase (JPM, Fortune 500) advanced 17%.
The Philly KBW Bank (BKX) index soared over 12% and the Amex Securities Broker/Dealer (XBD) index climbed 17%. (Full story)
Other movers: Tech shares rallied, including Oracle (ORCL, Fortune 500), which reported higher quarterly earnings that beat estimates, on higher revenue that missed estimates Thursday night. Shares climbed 7% Friday.
Cisco Systems (CSCO, Fortune 500), Apple (AAPL, Fortune 500), IBM (IBM, Fortune 500) and Hewlett-Packard (HPQ, Fortune 500) all gained as well.
Telecom shares jumped, including Sprint (S, Fortune 500), Ciena (CIEN) and Dow stock AT&T (T, Fortune 500).
Gains were broad-based, with 23 of 30 Dow components rising. Among the gainers: GM (GM, Fortune 500) climbed 14%, GE (GE, Fortune 500) rose 7% and Chevron (CVX, Fortune 500) gained 6%.
Market breadth was positive and volume was very heavy. On the New York Stock Exchange, winners topped losers 7 to 1 on volume of just short of 3 billion shares. On the Nasdaq, advancers beat decliners by over 3 to 1 on volume of 4.05 billion shares.
Volume was exacerbated by the quarterly options expiration, an event in which stock index futures and options and individual stock futures and options all expire simultaneously. This can cause volatility in the underlying stocks.
Fuel prices: Oil prices rallied, with U.S. light crude oil for October delivery climbing $6.67 - the second biggest one-day dollar gain ever - to settle at $104.55 a barrel on the New York Mercantile Exchange.
Oil prices had been plummeting since peaking at $147.27 a barrel on July 11, as investors bet that sluggish global growth will diminish oil demand. But over the last few sessions, prices have been bouncing back.
Other markets: In global trade, European and Asian markets rallied.
Treasury prices tumbled as investors pulled money out of the safe-haven investment and poured it into stocks. The slump boosted the yield on the benchmark 10-year note to 3.73% from 3.54% late Thursday. Treasury prices and yields move in opposite directions.
Over the last few sessions, bond prices have been surging, sending the yields to multi-month lows as frantic equity investors have looked for other places to park their money.
Gold prices had been surging for the same reason. On Friday, COMEX gold for December delivery fell $32.30 to settle at $864.70 per ounce after jumping over $116 per ounce over the last two sessions.
In currency trading, the dollar fell against the euro and rallied 1.5% against the yen.
Gas prices fell for the second straight day Friday, after tumbling for eight days in a row in the aftermath of Hurricanes Gustav and Ike. (Full story). 
