Reporting from New York and Los Angeles —
Worries about Europe's debt troubles sent stocks diving again Tuesday — until some investors decided that enough was enough, and the market staged a stunning reversal.
The Dow Jones industrials plunged as low as 9,774 — down 293 points, or 2.9%, from Monday's close — in the first minutes of trading. But the blue-chip index quickly pulled up from that low and then rallied strongly in the last two hours of the session to finish down just 22.82 points, or 0.2%, at 10,043.75.
Broader market indexes also bounced back from deep losses early in the day, some closing with small gains.
Traders said the rebound was driven in large part by investors who think the market's correction since late April has been driven not by sound thinking but rather by unreasonable fears of economic fallout from Europe's finances, Congress' banking-regulation overhaul and BP's massive Gulf of Mexico oil spill.
"There is a lot of irrational behavior out there," said Joe Cusick, a senior market analyst at OptionsXpress. "With this kind of emotion floating around, it has lent itself to some traders finding a real opportunity to buy."
On Monday, an escalation of military tensions on the Korean peninsula entered the mix, sending Asian and European stocks tumbling before Wall Street opened. Markets weren't helped by fresh signs of strain in Spain's banking sector. Key share indexes sank more than 3% in Tokyo and Madrid.
In the U.S., the one major piece of economic data released Tuesday morning in the U.S. was upbeat: The Conference Board reported that its index of consumer confidence jumped much more than expected to its highest level since March 2008.
Market optimists contend that the good news about the recovering American economy is being ignored because of a fixation on bad news.
"There's wonderful data going under the bridge every day," said Jim Paulsen, chief investment strategist at Wells Capital Management. "We've just got a cultural mindset that is hypersensitive — suffering from a crisis psychosis."
Pessimists, however, have focused on the risk that Europe's troubles will spread to the United States in the form of another financial crisis and another contraction in the economy.
In a speech Tuesday, the head of the Federal Reserve Bank of St. Louis, James Bullard, called such a development "certainly possible," but, he added, "I do not think this is a likely scenario."
Bullard said the U.S. "may actually be an unwitting beneficiary of the crisis in Europe" if the flight to American Treasury bonds drive down interest rates in the U.S.
Treasury Secretary Timothy F. Geithner is heading to London on Wednesday to try to assuage the problems there.
Speaking to reporters during his trip to China on Tuesday, Geithner reiterated his belief that Europe can solve its economic problems. "It's important to understand that Europe has the capacity to manage these challenges. And we're confident they will," Geithner said.
In the U.S., bank stocks have been seen as most directly vulnerable to Europe's problems, because of the possibility that Greece or another debt-burdened country could default. As bank shares again fell Tuesday, analyst Dick Bove at Rochdale Securities said it was all being overdone.
"There is a panic in the markets at present," he wrote in a note to clients. "This is creating solid buys in bank stocks."
Financial stocks led the afternoon rally, in part thanks to comments by Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, indicating that a key measure opposed by banks would be removed from the financial overhaul legislation.
At its low of the day, the Dow was down 13% from its April 26 high. Similarly, the Standard & Poor's 500 index was off nearly 15% from its late-April peak. The Russell 2,000 small-stock index's low for the day marked a drop of 17% from its April high.
"You're getting to where stocks are cheap," Dave Rovelli, head of trading at brokerage Canaccord Adams in New York, said amid the day's rout.
Even Hong Kong money manager Marc Faber, a well-known pessimist on equities, said in a Bloomberg TV interview Tuesday that the market had become "oversold" and could be set up for a near-term rally.
Market bears now have to be wary about betting on another plunge in share prices soon in light of the market's comeback Tuesday, said trader Jon Najarian at OptionMonster.com in Chicago.
"What more could the bears possibly throw at the market?" he said.