NEW YORK - Wall Street turned lower Tuesday as investors reacted enthusiastically to the U.S. government's plans to spend $250 billion to buy stock in private banks but also collected profits from the previous day's massive advance. The Dow Jones industrial average was modestly lower a day after its record 936-point jump.
Profit-taking started creeping into the market after the Dow surged more than 400 points at the opening, and it was expected that some investors would take some money out of the market after such a massive gain. Moreover, it was widely anticipated that Wall Street would continue to see volatility in the weeks and perhaps months ahead because of the weakness in the economy.
Investors had snapped up stocks Monday in anticipation of the government's plan. President Bush said Tuesday the government will use a portion of the $700 billion bailout to inject capital into the nation's major banks, which have been slammed by souring mortgage investments. The move follows a similar one announced Monday by European governments to invest about $2 trillion in their own troubled banks.
Investors are hoping extraordinary steps by government officials will help resuscitate stagnant credit markets.
The revised bailout plan differs from the original in that it aims to recapitalize banks, not just buy the troubled assets off their books at prices that could leave the banks with losses.
"This begins to penetrate the core of the problem," said Peter Cardillo, chief market economist at New York-based brokerage house Avalon Partners Inc.
But, he said, "there will be a point in time where the euphoria of the bailout plan begins to wear off and the market begins to face reality. And that reality is likely to be a sour earnings season, and that the economy is in recession."
In midmorning trading, the Dow fell 43.49, or 0.46 percent, to 9,344.12.
Broader stock indicators also fell. The Standard & Poor's 500 index slid 3.73, or 0.37 percent, to 999.62 and the Nasdaq composite index fell 43.21, or 2.34 percent, to 1,801.04.
Advancing issues outnumbered decliners by about 2 to 1 on the New York Stock Exchange, where volume came to 511.4 million shares.
Ryan Detrick, senior technical strategist at Schaeffer's Investment Research, said investors pleased about the government's bank plan likely saw industrial and insurance companies, for example, as more likely to benefit from a revived credit market than technology companies. That offered less support for the Nasdaq, he said.
"People are thinking more of the blue chips are going to respond," he said.
The Dow remains 33.7 percent below its Oct. 9, 2007 record close of 14,164.53, and could fluctuate around these levels for some time as investors wait for signs of stabilization in the slumping housing market and deteriorating job market.
Cardillo said he believes the worst lows are behind the stock market, but other analysts have shied away from saying Wall Street had reached a bottom. The Dow has not yet fallen below its low during the last bear market, the closing level of 7,286.27 on Oct. 9, 2002.
Following the Columbus Day holiday, the U.S. government bond markets reopened Tuesday and indicated that investors' desire for safe assets remains strong though overall demand appeared to ease. The three-month Treasury bill's yield rose to 0.49 percent from 0.21 percent late Friday, and the 10-year note's yield rose to 3.98 percent from 3.86 percent.
Banks appear to be growing somewhat more willing to lend to one another. The London interbank offered rate, or Libor, for three-month dollar loans fell to 4.64 percent from 4.75 percent. Libor is important because many consumer loans, including about half of all adjustable-rate mortgages, are tied to it.
The U.S. stock market has been rebounding from a gruesome week that obliterated about $2.4 trillion in shareholder wealth. The Dow came off an eight-day losing streak that amassed point losses of just under 2,400, or 22.1 percent, bringing the blue-chip index to its lowest level since April 2003. That 18.2 percent weekly plunge in the Dow was the worst in the index's 112-year history.
The recent sell-off in stocks arrived amid a seize-up in lending, as banks and investors around the world grew fearful about the creditworthiness of other institutions following the bankruptcy of investment bank Lehman Brothers Holdings Inc. and the failure of thrift bank Washington Mutual Inc. When lending is at a virtual standstill, the economy cannot grow.
With investors worried that regional U.S. banks might be the next to fall, the decision by Madrid-based Banco Santander late Monday to buy Philadelphia-based thrift Sovereign Bancorp Inc. came as another relief. The Spanish bank, which already owned a 25 percent stake in Sovereign, bought the rest of the bank at a premium for $1.9 billion. Sovereign rose 14 cents, or 3.8 percent, to $3.82.
The Russell 2000 index of smaller companies fell 13.14, or 2.30 percent, to 557.75.
Asian and European markets shot higher. Hong Kong's Hang Seng index rose 3.19 percent, after a more than 10 percent increase on Monday. Japan's Nikkei index, catching up from the country's market holiday Monday, jumped 14.15 percent — the largest increase ever.
In afternoon trading in Europe, Britain's FTSE 100 jumped 4.48 percent, Germany's DAX index rose 2.96 percent, and France's CAC-40 rose 2.82 percent.