NEW YORK — Wall Street turned cautious Tuesday after a two-day rally as disturbing corporate news reminded investors of the magnitude of the economy's troubles. Stocks tumbled while demand for the safety of government debt surged.
Although the market was down sharply, the pullback was uneven, showing that investors are uneasy but also very selective. The Dow Jones industrials fell 243 points, or 2.72 percent, but the Nasdaq composite index fell a more moderate 1.55 percent as investors decided to buy some hard-hit technology names.
Meanwhile, demand for the safety of Treasury bills spiked so high that investors were willing to earn no return at all on investments bought at a Treasury Department auction. Interest rates on four-week Treasury bills slid to zero from 0.04 percent in an auction just a week earlier.
"The markets are just expressing a tremendous amount of ambivalence about the future," said Marian Kessler, co-portfolio manager of the Becker Value Equity Fund in Portland, Ore. "The market is grappling with what is certainly going to be a fairly deep recession in 2009."
To be sure, recent trading has indicated that big institutional investors are hedging their bets and putting money on both sides of the market. They have been looking for signs of recovery in a stock market that is down 43 percent from its October 2007 peak but are also keeping a hand in cash and bonds in case a run-up in stocks since last month gives way.
Despite Tuesday's drop on Wall Street, there is budding optimism about stocks simply because of the more orderly trading that has emerged since mid-November. Some observers speculate that the market is slowly forming a bottom, but the drumbeat of poor economic news makes it unlikely that the market's overall volatility is waning.
Investors are worried that companies' difficulties could make an economic turnaround harder. FedEx, a barometer of the U.S. economy, cut its forecast for fiscal 2009 earnings and capital spending as the slumping economy eroded package deliveries. Meanwhile, Danaher Corp., which manufactures bar code readers and Sears' Craftsman tools, reduced its fourth-quarter profit forecast and announced plans to cut 1,700 jobs.
The stock market's retreat wasn't a surprise given the steep advance of the past two sessions. But the reasons for the selling weren't simply based on two days of gains, analysts said. Wall Street is still trying to determine how badly companies' woes will dent profits and how soon President-elect Barack Obama's plan to introduce a flood of public works spending could aid the economy.
The Dow Jones industrial average fell 242.85, or 2.72 percent, to 8,691.33 after logging a gain 560 points over Friday and Monday.
Broader stock indicators also declined. The Standard & Poor's 500 index fell 21.03, or 2.31 percent, to 888.67. The Nasdaq composite index fell 24.40, or 1.55 percent, to 1,547.34.
The Russell 2000 index of smaller companies fell 15.67, or 3.26 percent, to 465.71.
Declining issues outnumbered advancers by more than 2 to 1 on the New York Stock Exchange, where consolidated volume came to 5.57 billion shares compared with 6.42 billion shares traded Monday.
The market's run since last month has led to some hopes that stocks might be carving out a sustainable recovery. Since reaching multiyear trading lows on Nov. 20, the Dow has risen 15 percent and the broader Standard & Poor's 500 index has risen 18.1 percent, while the Nasdaq is up 17.6 percent, even with Tuesday's decline.
Bond prices rose after the Treasury auction and as stocks fell. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 2.65 percent from 2.74 percent late Monday. The yield on the three-month T-bill, considered one of the safest investments, rose to 0.03 percent, from 0.01 percent late Monday. Still, the low yields indicate a high degree of investor unease.
The dollar was mixed against most other major currencies, while gold prices slipped.
Oil prices fell even amid investor expectations that OPEC will announce a big production cut next week to curb crude's stunning 70 percent-free-fall over the past five months. Light, sweet crude fell $1.64 to settle at $42.07 a barrel on the New York Mercantile Exchange.
Wall Street is waiting for lawmakers to finish negotiating a $15 billion bailout for General Motors Corp. and Chrysler LLC. A deal, which might occur as early as Wednesday, reportedly would give the government an ownership stake in the automakers. The market has been concerned that a collapse of GM, Chrysler or Ford Motor Co. would trigger massive job losses, and further stymie the government's efforts to lift the U.S. out of a recession.
GM fell 23 cents, or 4.7 percent, to $4.70, while Ford fell 15 cents, or 4.4 percent, to $3.23. Chrysler LLC isn't publicly traded.
FedEx tumbled $10.78, or 14.5 percent, to $63.65, after issuing its forecast. Danaher fell $2.18, or 4.2 percent, to $49.78.
But in a sign that the market is still willing to place some bets on an eventual recovery in the economy, companies that make microchips saw some buying despite a disappointing forecast from Texas Instruments Inc. Some investors are anxious about missing a market bottom when defensive names like consumer goods companies likely would lag somewhat riskier bets like tech stocks.
Texas Instruments rose 73 cents, or 4.9 percent, to $15.55, while Intel Corp. rose 36 cents, or 2.6 percent, to $14.30.
Stock markets were mixed overseas. Major European bourses rose. Britain's FTSE-100 added 1.89 percent, Germany's DAX advanced 1.34 percent and France's CAC-40 rose 1.55 percent. Hong Kong's Hang Seng index closed down 1.94 percent after a big surge on Monday, while Japan's Nikkei 225 added 0.80 percent.
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New York Stock Exchange: http://www.nyse.com
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