Cure-all or Band-Aid?
That's what investors will try to decide in the coming days as they digest the details of the massive mortgage rescue plan unveiled Friday by federal officials.
The immediate verdict, at least judging by the reaction on Wall Street, was that Treasury Secretary Henry M. Paulson Jr. and his cohorts had delivered a masterstroke. The Dow Jones industrial average surged 368.75 points, adding to the 410-point gain it notched Thursday as news of the government plan leaked out.
Under the proposal, the government would purchase hundreds of billions of dollars of bad debt from troubled banks and take the unprecedented step of insuring individual investors against losses in money-market mutual funds.
The government hopes these moves will restore confidence to participants in global credit markets, freeing up lending to consumers and businesses that have had trouble getting loans during the current crisis.
But the lack of specifics has some market watchers wondering whether the party may have started a bit prematurely.
"Investors are overreacting," said Peter Boockvar, equity strategist at New York brokerage house Miller Tabak & Co. in New York. "They're just assuming that everything will be OK, but we haven't seen the details yet."
For instance, Boockvar said, what if banks and other institutions balk at selling their soured debt securities to the government at cut-rate prices? The issue is thorny because the value of many exotic mortgage-related securities is hard to gauge. Even if the government succeeds in calming the credit markets, the health of the U.S. economy remains a concern for the stock market.
"Let's assume we've cleared the decks and the credit market issues are solved," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. "We're still faced with an economy where corporate profits are going to struggle to meet mid-single-digit growth over the next four quarters."
And the housing market -- the root cause of the current credit crisis -- continues to struggle with rising foreclosures, falling home prices and high inventories of unsold houses.
At least for a day, however, the clouds over Wall Street parted and buyers were in control. The Dow industrials' 3.4% gain to 11,388.44 gave the blue-chip average its biggest two-day percentage gain since October 2002 and its biggest back-to-back point gains since March 2000.
It also lifted the widely watched barometer out of bear market territory -- barely. The Dow is now off 19.6% from the all-time high it reached in October. Analysts generally consider a 20% decline the benchmark for a bear market.
The broader Standard & Poor's 500 index jumped 48.57 points, or 4%, to 1,255.08, and the tech-heavy Nasdaq composite index climbed 74.80 points, or 3.4%, to 2,273.90.
About seven stocks rose for every one that fell on the New York Stock Exchange, where trading volume was extremely heavy but below Thursday's pace. In Europe, bourses in London and Paris rose about 9%, and Asian markets were up as well.
The Dow ended the week just 34 points, or 0.3%, below last Friday's close -- a notable recovery after losses of 504 points on Monday and almost 450 on Wednesday. The S&P 500 actually rose 0.3% for the week, and the Nasdaq gained 0.6%.
On Friday, financial stocks, which have borne the brunt of the market downturn, soared 11%. They were the best-performing sector in the Standard & Poor's 500 index for the second day in a row.
Those shares were helped by the Securities and Exchange Commission's controversial decision to place a temporary ban on short selling -- a tactic for profiting from falling share prices -- in 799 financial stocks. Shares of investment bank Morgan Stanley, which has painted itself as a victim of rampant short selling, jumped $4.66, or 21%, to $27.21. Goldman Sachs rose 20%, rising $21.80 to $129.80.
Although welcomed by some, the SEC action drew sharp criticism from some observers, including former Federal Reserve Chairman Alan Greenspan, who called it a "terrible idea."
Meanwhile, yields on Treasury bills rose, a sign that investors were moving money out of the perceived safety of government debt and into stocks. The annualized yield on the three-month Treasury bill soared more than tenfold to 0.92% from 0.08% late Thursday. The benchmark 10-year bond shot up to 3.81% from 3.55%.
Gold, another traditional safe haven, fell $32.10 to $860.60 an ounce after rising $116 an ounce over the previous two days. Investors also pulled money out of "defensive" consumer-staple stocks, which tend to hold up better than other sectors during market downturns. Procter & Gamble slipped 95 cents to $70.36, and Coca-Cola lost 67 cents to $52.72.
Oil jumped $6.67 a barrel, or 7%, to $104.55 on speculation that resolving the banking crisis could spur demand for crude. That boosted energy stocks such as Exxon Mobil, which gained $1.86 to $79.61, and Chevron, which rose $4.92 to $87.80.
Meanwhile, the dollar fell against other major currencies, which may have contributed to the rise in oil prices.
Times staff writer Walter Hamilton contributed to this report.