Adding to the steep losses posted in the previous session, stocks turned in another dismal performance on Tuesday amid lingering concerns about the health of the economy. While the Federal Reserve announced a measure to buy up massive amounts of commercial paper, investors remained skeptical that it would help inject liquidity into the markets.
Stocks saw initial strength after the Federal Reserve said that it would step into the commercial paper market in order to provide enough liquidity to help corporations properly manage their working capital, announcing the creation of a Commercial Paper Funding Facility.
The facility will purchase three-month unsecured and asset-backed commercial paper directly from eligible issuers, providing what it calls a "liquidity backstop".
Following the $700-billion financial relief plan aimed at easing pressure on financial institutions that Congress passed last week, the Commercial Paper Funding Facility will impact a wider variety of companies.
Federal Reserve Chairman Ben Bernanke also hinted Tuesday that the central bank might look to cut interest rates in the near future, a move that many experts have been pushing for in recent days to help protect the overall economy from the turmoil in the financial markets.
In remarks to a business economics association, the Fed chief highlighted recent evidence that shows a growing threat of a further downturn in the economy and noted an improvement in the inflation outlook lately.
Nonetheless, the markets remained skeptical that the various measures by the government will keep the economy out of a recession. With Alcoa (AA) kicking off the unofficial start to earnings season after the market close, investors are bracing themselves for a rough ride in the upcoming weeks.
In other news, Bank of America (BAC) reported a 68 percent decline in its quarterly profit and slashed its dividend, sending financials lower. Later in the day, a rumor that Japan's Mitsubishi UFJ was pulling out of a deal to acquire a stake in Morgan Stanley (MS) added to the decline. While Morgan Stanly refuted the rumor and said that the deal would close on time, the stock still ended the session down 24.9 percent.
The major averages saw additional selling pressure in late day trading, ending the day at or near their worst intraday levels. The Dow and the S&P 500 set five-year closing lows, while the Nasdaq set a four-year closing low. The Dow closed down 508.39 points or 5.1 percent at 9,447.11, the Nasdaq closed down 108.08 points or 5.8 percent at 1,754.88 and the S&P 500 closed down 60.66 points or 5.7 percent at 996.23.
Sector News
Airline stocks turned in some of the worst performances, hurt by a sharp increase in oil prices. The Amex Airline Index fell 15.6 percent, adding to the declines seen in the previous three sessions. With the drop, the index set a two-month closing low. The price of oil ended the session up $2.25 at $90.06 a barrel.
Within the airline sector, Continental Airlines (CAL) and AMR Corp. (AMR) were among the biggest decliners. Continental closed down 19.4 percent, compared to an 18.7 percent drop by AMR Corp.
Amid continued worries that a global slowdown could hurt demand, steel stocks also saw significant selling pressure. The Amex Steel Index saw a decline of 11.3 percent, setting a two-year closing low. The index has been trending lower for the past four months.
Hurt by the weakness seen in Bank of America and Morgan Stanley, the financial sector ended the session sharply lower as well. The KBW Bank Index fell 10.7 percent, setting a two-month closing low. The Amex Securities Broker/Dealer Index ended the session down 9 percent, at its worst closing level in five years.
Despite the increase in oil prices, oil service stocks posted substantial losses as well, with the Philadelphia Oil Service Index closing at its worst level in nearly three years. The index closed down 8.4 percent.
Other stocks that saw notable declines include real estate, housing and computer hardware stocks. The Morgan Stanley REIT Index close down 7.8 percent, the Philadelphia Housing Index closed down 7.4 percent and the Amex Computer Hardware Index closed down 7 percent.
Dow Components
The Dow components ended the session with substantial losses, sending the blue chip index to a five-year low. Bank of America led the components lower, plunging 26.2 percent. The stock fell in the previous three sessions, and Tuesday's decline sent it to a two-month closing low.
After the closing bell on Monday, Bank of America reported a sharp decline in third quarter earnings as a 21 percent growth in revenue was offset by a significant increase in credit costs. The quarterly results were released two weeks earlier than scheduled.
At the same time, the company also slashed its quarterly dividend by 50 percent and said it plans a $10 billion stock-sale to raise capital to achieve an 8 percent Tier 1 capital ratio.
The weakness in Bank of America sent other financials lower as well, including Citigroup (C), JP Morgan Chase (JPM) and American Express (AXP). Citigroup closed down 13 percent, compared to a 10.6 percent decline by JP Morgan Chase. American Express fell 6.1 percent.
General Motors (GM) also saw significant selling pressure. Shares of the automaker slid 10.9 percent, setting a record closing low. The stock has been trending lower for the past two weeks.
Ahead of the release of its quarterly results, Alcoa (AA) showed considerable weakness as well. The stock fell 7.7 percent, extending a recent downtrend. With the decline, the stock set a nine-year closing low.
Other Dow components that posted substantial losses include Microsoft (MSFT), Pfizer (PFE) and Walt Disney (DIS). Microsoft closed down 6.7 percent, Pfizer closed down 6.8 percent and Walt Disney closed down 6 percent.
Other Markets
Stock markets across the Asia-Pacific region closed mixed on Tuesday after opening sharply lower following Wall Street's plunge overnight. While the stock markets in Australia and South Korea rebounded after seeing early weakness, Japan's Nikkei 225 average snapped back some of its losses over the course of trading but still closed down 3 percent.
The major European markets ended the session mixed as well. While Germany's DAX Index closed down 1.1 percent, France's CAC 40 Index ended the session 0.6 percent higher and the U.K.'s FTSE 100 rose 0.4 percent.
Meanwhile, treasuries ended the session with notable losses. The benchmark ten-year note fell sharply in the morning, but it pared nearly half of its loss in the afternoon. Subsequently, the yield on the ten-year note ended the session up 8 basis points at 3.506 percent.
Looking Ahead
The economic calendar is fairly light on Wednesday. The National Association of Realtors will release its report on pending home sales, which is a leading indicator of housing activity. Later in the morning, the Energy Information Administration will release its weekly oil inventory report.
On the earnings front, Alcoa is expected to release its third quarter results after the closing bell on Tuesday, unofficially kicking off earnings season. Alcoa is expected to report earnings of $0.53 per share compared to the same quarter last year when it earned $0.64 per share.
Before the opening bell on Wednesday, Monsanto Co. (MON) is expected to release its fourth quarter results. The company is expected to report a loss of $0.09 per share compared to a loss of $0.18 per share in the previous year's quarter.
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