Stocks close strong after Monday's huge decline

updated 4:07 p.m. ET Dec. 2, 2008

NEW YORK - Investors returned cautiously to the stock market Tuesday, wary about the downtrodden economy while trying to recoup some of the ground in the previous session’s enormous decline. The major indexes rose by more than 3 percent.

The advance was initially fueled by some reassuring words from Ford Motor Co. Chief Executive Alan Mulally, who said the automaker has enough cash to make it through 2009 and might not need government help. Meanwhile, the market was encouraged after General Electric Co. said it expects to pay a dividend despite projections that fourth-quarter results will near the low end of its previous guidance.

That raised some hopes that U.S. companies may fare better during the recession than the market has feared. Meanwhile, investors got an additional lift after the Federal Reserve said it will extend the life of key programs aimed at loosening the credit markets and restoring stability to the financial sector.

But, that still wasn’t enough to completely calm investors who are weary after huge swings in the market the past few months. Analysts said the volatility underscores how bear markets operate, with investors buying up stocks that look cheap and quickly selling when the market’s sentiment turns negative.

“We’ve had a nice bounce back, and all you can do is hope it holds,” said Todd Leone, managing director of equity trading at Cowen & Co. “These swings are part of the market now, but the underlying problems aren’t going to suddenly go away.”

The market remains uncertain about what might lie ahead, from how long the recession might last to more troubles in the struggling financial sector. Wall Street this week is wary about a number of reports due to be released, primarily Friday’s jobs report that is widely considered the most important economic reading of the month.

According to preliminary calculations, the Dow Jones industrial average closed up 270 points, or 3.31 percent, to 8,419.09 after falling nearly 680 points on Monday.

The Standard & Poor’s 500 index rose 32.61, or 4 percent, to 848.82, while the Nasdaq composite index gained 51.73, or 3.70 percent, to 1,449.80.

The Russell 2000 index of smaller companies rose 15.62, or 3.75 percent, to 432.69.

Bond prices were mixed. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 2.71 percent from 2.76 percent late Monday. The yield on the three-month T-bill, considered one of the safest investments, rose to 0.05 percent from 0.03 percent late Monday.

The volatility that has plagued the stock market in recent months is typical of periods marked by low economic growth, analysts said. Some, however, are concerned that investors may have gotten carried away during the most recent rally.

Detrick of Schaeffer’s Investment Research said there still might be too much optimism in the market, considering the five-straight days of advances prior to Monday’s drop. He said there was too much excitement on the part of investors that a bottom might have formed, and that sets the market up for disappointments.

“There’s too much talk of valuations, people jumping in on the bullish side after a bounce,” he said. “And that’s not how bottoms form, and that’s not going to take this market continually higher.”

There was further evidence Tuesday that the housing sector remains under pressure. Homebuilder Beazer Homes USA Inc. said its fiscal fourth-quarter losses more than tripled as revenue plunged. The company said demand for new homes continues to be hurt by low consumer confidence, falling prices, extensive supply and less access to financing.

Beazer shed 25 cents, or 17 percent, to $1.25.

Most financial stocks bounced back Tuesday, with the exception of Goldman Sachs Group Inc. Concerns that the firm’s exposure to the volatile stock markets has led several analysts to forecast a steep loss for the company’s fiscal fourth quarter.

On Tuesday, UBS analysts predicted Goldman will lose $5.50 per share for the quarter ended Nov. 30, compared with a previous estimate for a loss of 40 cents per share. The UBS adjustment comes a day after a Credit Suisse analyst predicted the bank will lose $4 per share. Just a month ago, analysts were projecting Goldman would post a profit, according to a poll by Thomson Reuters.

Goldman Sachs dropped $2.96, or 4.5 percent, to $62.80. Bank of America Corp. rose $1.27, or 9.8 percent, to $14.12, while JPMorgan Chase & Co. added $1.25, or 4.8 percent, to $27.37.

Meanwhile, General Electric Co. said it expects fourth-quarter earnings to be near the low end of its previous guidance. However, the company said it still expects to pay a dividend of $1.24 per share in 2009.

GE rose $1.51, or 9.7 percent, to $17.01.

Shares of automakers jumped on the prospect for a bailout. Ford gained 25 cents, or 9.8 percent, to $2.80, while General Motors rose 23 cents, or 5 percent, to $4.82.

The dollar fell against other major currencies. Gold prices rose.

Light, sweet crude fell 13 cents to $49.15 a barrel on the New York Mercantile Exchange.

Overseas, Japan’s Nikkei stock average fell 6.35 percent. Britain’s FTSE 100 rose 1.41 percent, Germany’s DAX index gained 3.12 percent, and France’s CAC-40 rose 2.35 percent.

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