Major U.S. stock indexes lurched in and out of negative territory Thursday in a volatile session before shooting higher in the final hour of trading on the latest hope of a government solution to the current financial crisis.
Market players faced myriad uncertainties about the state of the financial system, with big questions on the future of major investment banks and the role of short sellers in their recent troubles, whether central banks can unlock frozen credit markets, and the health of money market funds.
But a CNBC report late in Thursday's session said that Treasury Secretary Henry Paulson might be working on a Resolution Trust Corp.-type solution to the current financial crisis, which many observers have urged. The RTC was created to clean up the 1980s savings and loan mess.
Traders have been looking for possible action from Washington in the fast-moving financial crisis as President Bush canceled a planned overseas trip. Bush sought to reassure markets and the public about the growing financial crisis, but offered no plans.
Also Thursday, global central banks pumped $180 billion into the banking system.
On Thursday, the Dow Jones industrial average jumped 410.03 points, or 3.86%, to 11,019.69 after tumbling 4.06% Wednesday. The broader S&P 500 index shot higher by 50.12 points, or 4.33%, to 1,206.51 after falling 4.71% in the previous session. The tech-heavy Nasdaq composite index soared 100.25 points, or 4.78%, to 2,199.10 after a 4.94% plunge Wednesday.
On the New York Stock Exchange, 24 stocks were higher in price for every eight that fell. The ratio on the Nasdaq was 21-8 positive. Trading was active.
Bonds fell in a volatile session as Putnam closed an institutional prime money market fund, the Philadelphia Fed's economic activity index for September unexpectedly rose, and weekly jobless claims moved higher. The dollar index rebounded from earlier losses. Gold futures were up. Oil futures were mixed.
Markets have been whippy of late, but Thursday's session was something else. Indexes started solidly higher after the global liquidity jamboree and the better than expected Philly fed reading. But confidence issues resurfaced, between further sell-offs in shares of major Wall Street firms Morgan Stanley (MS; +3.7%) and Goldman Sachs (GS; -5.7%) and worries about trouble at money market funds. The news of a potential government body to deal with the crisis came out of the blue, and sparked the late-session euphoria.
Regulators continued to get tough on on short sellers, who have been blamed for the steady, precipitous declines of Morgan Stanley and Goldman Sachs over the past several days. On Thursday, the SEC's ban on naked short covering went into effect. New York State Attorney General Andrew Cuomo announced a probe into illegal short selling. Also Thursday, UK regulators banned short selling on financial shares until Jan. 19.
Financial institutions fought back against perceptions of weakness. Morgan Stanley CEO John Mack told employees to stand fast and hold on to their shares, which is what senior management is doing. He explained that authorities were beginning to understand the systemic risk posed by short-selling and that the bank had lost some of its prime brokerage money during the turmoil, but this would have minimal impact on the firm's liquidity. In a town hall meeting with staff, he said the firm is pursuing multiple options and had spoken with Goldman several times on short-selling issues.