NEW YORK – Wall Street erased an early rally Monday as enthusiasm about a $586 billion stimulus package in China fizzled and gave way to nervousness about how U.S. companies will survive a severe pullback in spending.
China's plans to boost its economy through a mix of spending, subsidies, looser credit policies and tax cuts sparked rallies in Asian and European markets. The package could benefit multinational companies with business in China such as General Electric Co. and Caterpillar Inc.
However, the impact on the United States is likely to be limited — and could mean that China buys fewer U.S. Treasury bonds going forward. That's a problem because the U.S. government is planning to sell a huge amount of Treasurys in the coming months to finance its financial system bailout.
And while many investors are eager to grab stocks that have become cheaper the past few months, there is still a great deal of uncertainty about the health of corporate America. Several industries, notably automakers, are seeing sales drop precipitously. And in a stark reminder that even large, established companies are suffering, electronics retailer Circuit City Stores Inc. filed for bankruptcy protection Monday.
"That's likely to hold any recovery somewhat in check," said Hugh Johnson, chairman and chief investment officer of Johnson Illington Advisors. "We're arguably undervalued, so we can work our way higher. But it's not going to be with a lot of gusto."
The U.S. government's announcement Monday that it would provide additional financial assistance to troubled insurance giant American International Group Inc. gave the insurer's shares a boost, but raised worries that problems in the financial sector might be worse than Wall Street anticipated. Shares of most large and small banks fell.
AIG, which reported a $24.47 billion loss for the third quarter, saw its shares rise 42 cents, or 19 percent, to $2.53. The government said it will pour $40 billion into the company in return for partial ownership. AIG, which got a bailout in September, has so far received a total of $150 billion in government aid.
In midday trading, the Dow Jones industrial average fell 11.39, or 0.13 percent, to 8,932.42, after rising more than 200 points in early trading.
Broader indexes also turned lower. The Standard & Poor's 500 index fell 5.77, or 0.62 percent, to 925.22; and the Nasdaq composite index fell 14.47, or 0.88 percent, to 1,632.93.
On Friday, the major indexes rallied, but ended about 4 percent lower on the week after large mid-week losses. Trading this week is expected to remain volatile; analysts have predicted the market will remain turbulent as it tries to recover from October's devastating losses.
"We had a nice movement on Friday. But the fact is, we haven't been holding rallies very well," said Scott Fullman, director of derivatives investment strategy for WJB Capital Group. He said investors appeared be cashing out Friday's gains ahead of what's expected to be a dismal retail sales report this week, and the bond market's Veterans Day holiday Tuesday.
With stocks trading erratically, investors moved to the relative safety of government bonds. The three-month Treasury bill's yield fell to 0.23 percent from 0.28 percent late Friday. A lower yield indicates higher demand. The yield on the benchmark 10-year Treasury note fell to 3.78 percent from 3.79 percent late Friday.
Investors are also watching for developments with General Motors Corp., Chrysler and Ford Motor Co. after the automakers met with congressional leaders last week in hopes of securing financial help.
GM — one of the 30 companies that make up the Dow — fell $1.06, or 24 percent, to $3.30. Ford shed 3 cents to $1.99.
Democratic leaders in Congress on Saturday asked the Bush administration to provide more aid to the struggling auto industry, which is losing money and shedding jobs as sales have dropped to their lowest level in a quarter century. House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid said in a letter to Treasury Secretary Henry Paulson that the administration should consider expanding the $700 billion bailout program to include car companies.
Circuit City filed for bankruptcy protection about a week after it said it would close 20 percent of its stores. The electronics retailer, based in Richmond, Va., has been struggling as nervous consumers spend less and credit has become tighter. Shares sank 14 cents, or 56 percent, to 11 cents.
Meanwhile, Citigroup Inc. is in talks to acquire a regional bank to boost the bank's presence in areas it already operates, including the Northeast, California and Texas, according to a report in The Wall Street Journal. The report, which did not name a potential target, said Chief Executive Vikram Pandit is attempting to broaden the bank's deposit base.
Shares of the bank fell 28 cents to $11.54.
The Russell 2000 index of smaller companies fell 4.66, or 0.92 percent, to 501.13.
Declining issues outnumbered advancers by about 3 to 2 on the New York Stock Exchange, where volume came to 416.8 million shares.
Oil gave up most of its early gains. A barrel of light sweet crude rose 12 cents to $61.16 on the New York Mercantile Exchange.
The dollar fell against most other major currencies, while gold prices rose.
Overseas, Japan's Nikkei stock average closed up 5.81 percent, and Hong Kong's Hang Seng index added 3.52 percent. In Europe, the Britain's FTSE 100 rose 1.45 percent, Germany's DAX added 1.76 percent, and France's CAC-40 rose 1.06 percent.