NEW YORK – Caution returned to Wall Street Monday as investors gave back some gains from last week's rally even as they found encouragement from President-elect Barack Obama's calls for an economic stimulus package.
Some retreat was to be expected after investors sent the Dow Jones industrial average to a two-month high on Friday; investors are wary about pouring more money into the battered market with economic data still weak and fourth-quarter earnings reports coming later this month.
Monday was expected to be the first real test of Wall Street in 2009 after many traders were on vacation on Friday, leading to light volume that may have exaggerated the market's move upward. Investors are still contending with fears about everything from the state of corporate earnings to consumers' willingness to spend during a recession.
Prices fluctuated throughout the session, but some analysts found signs that the market's improving tone from December was carrying over to the new year.
"There is some optimism out there that there is going to be a massive stimulus package by Obama that is going to get passed and that will help the economy," said Greg Church, chief investment officer of Church Capital Management.
Church warned, however, that a recovery will be difficult.
"The economy is still very weak. Unemployment is still high and is likely to get worse," he said.
But some analysts cautioned against drawing big conclusions from Monday's trading.
"We're not reading too much into this market right now, especially after Friday's big gain," said Matt King, chief investment officer at Bell Investment Advisors. "There's just not a lot of conviction behind it."
"I do think there is an element of profit-taking from Friday," when the Dow rose 258 points, he said.
The Dow closed down 81.80, or 0.91 percent, to 8,952.89 after falling as much as 142.
Broader stock indicators showed more modest declines. The Standard & Poor's 500 index fell 4.35, or 0.47 percent, to 927.45, and the Nasdaq composite index fell 4.18, or 0.26 percent, to 1,628.03.
The Russell 2000 index of smaller companies fell 0.81, or 0.16 percent, to 505.03.
Despite the pullback in the major indexes, advancing issues outnumbered decliners by about 2 to 1 on the New York Stock Exchange, where consolidated volume came to 4.76 billion shares, compared with a light 3.48 billion shares traded Friday.
The Dow registered its first close above 9,000 in two months on Friday. Last week, all the major indexes gained more than 6 percent, furthering a rally off multiyear lows that began Nov. 20.
Bond prices pulled back again Monday as investors prepared for the possibility that the government will issue more debt than the market has anticipated. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 2.48 percent from 2.39 percent late Friday. The yield on the three-month T-bill, considered one of the safest investments, rose to 0.09 percent from 0.07 percent.
The dollar rose against the euro and the yen, while gold prices fell.
Light, sweet crude rose $2.47 to settle at $48.81 a barrel on the New York Mercantile Exchange.
Analysts expect Wall Street will remain on edge as companies release their quarterly results and, more important, their forecasts for the year. Economists are expecting terrible profit reports and cautious forecasts but anything worse than expected could rock the market.
Kim Caughey, equity research analyst at Fort Pitt Capital Group, said investors are already bracing for lackluster earnings, a stance that could help Wall Street more easily absorb bad news. Since late November, a pessimistic market has often been able to shrug off some bad economic readings as unsurprising. Wall Street's ability to look beyond poor readings of the moment is an important step in forming a bottom for stocks.
"I think it may put a limit on the downside because we're already expecting things to be terrible. It's not going to take a whole lot to meet or exceed terrible," she said.
Caughey warned, however, that modest expectations likely won't be enough to take the market higher.
"It's just going to limp along," she said of the economy.
Some stocks and sectors saw selling Monday as analysts issued downbeat forecasts. JPMorgan Chase & Co., which last year scooped up ailing banks Washington Mutual and Bear Stearns, fell after a Deutsche Bank analyst late Sunday reduced his 2009 profit forecast for the company. He predicts JPMorgan will see increases in bad loans. The stock fell $2.10, or 6.7 percent, to $29.25 and was the steepest decliner among the 30 companies that make up the Dow industrials.
Another downgrade weighed on the telecommunications sector. Verizon Communications fell $2.16, or 6.2 percent, to $32.48, while AT&T Inc. fell 99 cents, or 3.4 percent, to $28.43. Both stocks are Dow components, and their declines steepened the average's drop.
Apple Inc. eased some investors' worries about the health of Steve Jobs, its chief executive. Wall Street closely associates his vision with the company's success. In a letter released Monday, Jobs acknowledged recent weight loss, and said his doctors believe he has a hormone imbalance. Jobs, a survivor of pancreatic cancer, will continue as CEO during his recovery. Apple rose $3.83, or 4.2 percent, to $94.58.