Stocks Fall as Uncertainty Remains

NEW YORK -- Wall Street pulled back sharply Monday as investors grew pessimistic over whether the Federal Reserve's efforts to shore up the credit markets would prove sufficient. Treasury prices surged as investors sought a safer haven for their money.

Stocks fluctuated, then moved lower, erasing some of the gains from Friday's rally, which came in response to the Fed's lowering of its discount rate. The Fed said Friday it stood ready to make further moves to keep credit and stock market losses from hurting the economy, but because it stopped short of a cut in the more important federal funds rate, uncertainty remained on Wall Street about the policymakers' intentions. The Fed is not scheduled to meet formally until Sept. 18, which means investors could remain jittery until then and could perhaps try to send stocks lower to force the issue with the Fed.

"Its a very trying market right now, and we're trying to hold on to some of the early gains, but there's a lot of uncertainties out there," said Peter Cardillo, chief market economist at New York-based brokerage house Avalon Partners. "The question is if the Fed did enough to satisfy the markets, and Wall Street will be relentless until they cut the fed funds rate."

Treasury bonds, which have rallied in recent weeks as investors fled to safe-haven securities, continued to move higher Monday. Bond prices move opposite their yields. Yields on the benchmark 10-year Treasury bond fell to 4.62 percent from 4.68 late Friday, while the shorter-duration notes such as the 3-year T bill saw yields fall more than 100 basis points, or 1 percentage point, to 4.07 percent.

Monday's decline wasn't unexpected; analysts had questioned how much conviction buyers had on Friday, as much of the rally was pinned on big institutional investors like hedge funds buying shares to cover their positions. Some investors had been shorting the market — betting stocks would move lower — and were caught off guard when the central bank cut the discount rate.

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Right after the market opened Monday, the Fed also announced it injected another $3.5 billion into the banking system. The central bank has infused the market with nearly $120 billion of liquidity since last week.

"It's a very trying market right now, and we're trying to hold on to some of the early gains, but there's a lot of uncertainties out there," said Peter Cardillo, chief market economist at New York-based brokerage house Avalon Partners. "The question is if the Fed did enough to satisfy the markets, and Wall Street will be relentless until they cut the fed funds rate."

In early afternoon trading, the Dow Jones industrials fell 83.89, or 0.64 percent, to 12,995.19. The blue chip index spent most of the morning bouncing into and out of positive territory.

Broader indexes fell. The Standard & Poor's 500 index fell 13.66, or 0.94 percent, to 1,432.28; the Nasdaq composite index fell 15.28, or 0.61 percent, to 2,489.75.

Light, sweet crude fell $1.48 to $70.50 on the New York Mercantile Exchange. Investors have been wary as Hurricane Dean heads toward Mexico, where major oil companies have already begun battening down oil rigs in the Gulf of Mexico.

The dollar was mixed against major currencies, while gold prices fell.

This week will be light on economic reports, which makes it a bit more difficult for investors to assess what the Fed might do at its rate-setting meeting. In one economic reading that arrived Monday, the Conference Board said its gauge of future economic activity moved slightly higher in July.

The research group's index of leading economic indicators rose 0.4 percent in July, as analysts expected. The index fell 0.3 percent in June, after rising 0.2 percent in May. The report is designed for forecast economic activity over the next three to six months.

Also Monday, the Chicago Federal Reserve was expected to release its July index on national business activity.

With earnings season mostly wrapped up, there was little in the way of corporate news for investors to trade off of. August is typically one of the slowest periods for equities markets.

Among the sectors leading the market lower was financial stocks, which spiked on Friday after the Fed announcement. The downtrodden sector stands to benefit from the Fed's discount rate cut. Goldman Sachs Group Inc. fell $4.24, or 2 percent, to $171.48, while Citigroup Inc. dropped 59 cents to $48.22.

Deutsche Bank shares fell $3.87, or 3 percent, to $124.82 after the Financial Times reported the bank had heeded the Fed's request by going to its discount window to borrow money.

Lowe's Cos., the No. 2 U.S. home improvement chain, reported second-quarter profit surpassed Wall Street projections. Despite the slumping housing market, the company said it will open 40 stores during the current quarter, and believes sales will rise 6 percent for the year. Lowe's shares rose $1.57, or 5.8 percent, to $28.44.

Declining issues outweighed advancers by about 9 to 7 on the New York Stock Exchange, where volume came to 864.7 million shares.

The Russell 2000 index of smaller companies fell 5.43, or 0.69 percent, to 780.60.

Overseas, Britain's FTSE 100 rose 0.24 percent, Germany's DAX index gained 0.40 percent, and France's CAC-40 rose 0.67 percent. In Asia, Japan's Nikkei stock average closed up 3 percent. Hong Kong's Hang Seng Index rose 5.93 percent, while the often-volatile Shanghai Composite Exchange surged 5.33 percent.

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