Stocks succumb to bleak Fed outlook

Wall Street erases most of the session's gains that followed the Federal Reserve's interest-rate cut.

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By Alexandra Twin, senior writer

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NEW YORK ( -- A stock rally fizzled out by the close Wednesday as investors digested the Fed's dour assessment of the economy and geared up for Thursday's GDP report.

The Dow Jones Industrial average (INDU) lost about 74 points, after having risen as much as 298 points shortly before the close. The Standard & Poor's 500 (SPX) index lost 1.1%, erasing gains. The Nasdaq composite (COMP) gained 0.5%, giving up a bigger advance.

The major gauges had gyrated wildly in the minutes after the release of the Fed decision and statement, before rallying in the last hour of trade and pulling back right before the close.

Policymakers voted to cut the fed funds rate by half a percentage point to 1.0%, as expected. That matched an all-time low for the fed funds rate last seen in June 2004. The fed funds rate is a bank lending rate that impacts business and consumer loans. (Full story)

The cut was expected but the statement "had a little more meat on it than it usually does," said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc.

In its statement, the central bankers painted a bleak picture of the economy, focusing on the lingering impact of the financial market crisis, the lack of available credit, and the erosion in consumer and business spending.

"The statement read like a laundry list of economic woes," said Stuart Hoffman, chief economist at PNC Financial Services. "It didn't include the word 'recession,' but it did include every euphemism for it."

Hoffman said that the central bank at this point realizes it can't stop a recession, but that it can do damage control to limit the length of one. He said that the cut is yet another of the many steps taken by the U.S. and central banks around the globe to try to stabilize markets.

The Fed has been cutting rates for more than a year in an effort to recharge the stalling economy. The Fed has also made potentially trillions available to financial institutions in an attempt to calm roiling financial markets and get banks to start lending to each other again.

Shapiro said he thinks the Fed is likely to hold rates steady and continue "throwing the full arsenal" at the financial crisis. Hoffman said he thought the statement implied the bankers could cut rates again at the next meeting in December.

Thursday brings the initial reading on third-quarter gross domestic product growth. Economists surveyed by expect that GDP fell by 0.5% annually after rising 2.8% in the second quarter.

A report released Wednesday morning showed demand for big-ticket items posted a surprise rise in September, thanks to military spending.

On Tuesday, the Dow surged 889 points - its second-best, single-day point gain - as investors scooped up shares hit in the recent retreat. In percentage terms, the advance of 10.9% was the sixth largest ever. The S&P 500 jumped 10.8%, and the Nasdaq composite jumped 9.5%.

Despite that advance, Wall Street is still set to end October with huge losses.

Lending rates: Meanwhile, the credit market continued to improve, with Libor, the overnight bank-to-bank lending rate, falling to 1.14% from 1.24% the previous day, according to Dow Jones. The 3-month Libor fell to 3.42% from 3.47%. (Full story)

The TED spread, the difference between what banks pay to borrow from each other for three months and what the Treasury pays, widened to 2.84% from 2.71% Tuesday. The spread hit a record 4.65% earlier this month. The narrower the spread, the more willing banks are to lend to each other.

The yield on the 3-month Treasury bill, seen as the safest place to put money in the short term, slipped to 0.57% from 0.75% late Tuesday, showing investors would rather see little return on their money than risk the stock market.

Last month, the 3-month yield reached a 68-year low around 0%, as investor panic hit its peak.

Treasury prices slipped, raising the yield on the benchmark 10-year note yield to 3.86% from 3.84% late Tuesday. Treasury prices and yields move in opposite directions.

Results: A variety of companies were reporting quarterly results as the third-quarter reporting period hit its midpoint.

With roughly 52% of the S&P 500 results out, profits are currently on track to have fallen 23.9% versus a year ago, according to the latest data from tracking firm Thomson Reuters.

Dow component Procter & Gamble (PG, Fortune 500) reported higher quarterly sales and earnings in its fiscal first quarter, topping estimates. However, the consumer-products maker also said that full-year earnings could be weaker than previously expected. P&G fell 3.5%.

Fellow Dow component General Motors (GM, Fortune 500) reported a steep drop in global third-quarter sales, with North American sales down 19% versus a year ago.

GM was also the subject of reports that it could ask Toyota Motor for help in turning around its business. GM declined to comment on the reports. Shares of GM rose 8.1%.

Another Dow component, Kraft Foods (KFT, Fortune 500), said third-quarter profit more than doubled due to a one-time gain resulting from its $2.6 billion sale of the Post cereals unit. Kraft shares fell 1.4%.

Market breadth was positive Wednesday. On the New York Stock Exchange, winners beat losers three to one on volume of 1.62 billion shares. On the Nasdaq, advancers topped decliners four to three on volume of 2.79 billion shares.

Other markets: The dollar tumbled versus the yen and gained against the euro.

The weakness in the U.S. currency helped propel dollar-traded commodities.

U.S. light crude oil for December delivery rallied $4.77 to settle at $67.50 a barrel, as investors reacted to the weaker dollar and the weekly oil inventories report. That report showed a smaller-than-expected buildup in crude supplies. Oil prices ended the previous session at a 17-month low.

COMEX gold for December delivery rallied $13.50 to settle at $754 an ounce.

Gasoline prices fell another 4 cents overnight, to a national average of $2.589 a gallon, according to a survey of credit-card activity by motorist group AAA. It was the 42nd consecutive day that prices have decreased. During that time, prices have fallen by $1.26 a gallon, or nearly 33%.

A brutal month: Barring a massive rally over the next two sessions, October will go down in the history books as one of Wall Street's worst months ever.

As of Wednesday's close, the Dow had lost 1,860 points, or 17.1% in October. Barring a massive rally over the next few sessions, the point loss will amount to the Dow's worst ever, according to Stock Trader's Almanac info going back to 1901. On a percentage basis, it doesn't rank in the top ten.

The S&P 500 lost nearly 236 points, or 20.3% in the month, and is currently on track to post its worst month ever on a point basis and eighth worst ever on a percentage basis, going back to 1930.

The Nasdaq dropped 425 points, or 20.4% in October, tracking it's seventh-worst month ever on a point basis and its fifth-worst month on a percentage basis, going back to its inception in 1971.  To top of page

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