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Frightened investors took no comfort in regulators' continued efforts to stanch the credit crisis and sent stocks to more steep losses, led by the financial sector.
The Dow Jones Industrial Average rose nearly 170 points at its morning high but slumped to finish lower for a fifth consecutive day, with the selling gaining momentum as the closing bell approached.
The Dow finished near its daily low, off 508.39 points, down 5.1%, at 9447.11. It was led down by a 26.2% plunge in shares of component
Bank of America, which is cutting its dividend and seeking $10 billion in capital.
J.P. Morgan Chase and
Citigroup also saw declines of more than 10% each. The Dow has plummeted more than 1400 points, or 13%, during its five-day losing streak.
Stocks began to turn sharply lower as chatter spread around trading floors that Mitsubishi-UFJ could abandon its agreement to take a stake in
Morgan Stanley. The buzz sent Morgan shares sliding roughly 30% and helped cause a broader rush out of stocks. Morgan Stanley later issued a statement saying that the deal remained on track, helping stanch the selloff, but its shares still ended down 24.9%. Rivals like
Merrill Lynch and
Barclays also cratered, falling 25.6% and 22.7%, respectively.
Peter Boockvar, equity strategist at Miller Tabak, said the "noise" surrounding Morgan Stanley had put the entire market on edge. "Everybody's nerves are completely fried," he said "On the slightest chance of a reversal, everyone runs for the doors."
Traders work on the floor of the New York Stock Exchange.
The selloff came even as regulators around the world took more steps to try and ease the credit crisis. The Federal Reserve said that it would attempt to unfreeze the commercial-paper market by setting up a vehicle to buy corporate debt. In an afternoon speech, Fed Chairman Ben Bernanke hinted that policy makers would soon cut interest rates. And British regulators were said to be close to finalizing details on a bailout for U.K. banks.
But credit markets still appeared strained. Interbank lending rates continued to tighten, signaling continued nervousness. The London Interbank Offered Rate, or Libor, for overnight dollar loans rose to 3.94% from 2.25%. Three-month dollar libor rose to 4.32%, near a nine-month high.
Adding to the feeling of uncertainty around the markets, earnings season began after the closing bell when
Alcoa reported third quarter results. The aluminum giant said its net fell 52% amid rising costs and weaker demand. Alcoa shares declined 7.7% during regular trading hours.
A series of grim earnings reports from major companies could further darken the market's already bleak mood. According to Thomson Reuters, which tracks Wall Street's earnings expectations, the consensus is that aggregate profits at S&P 500 companies will show a 5.&% drop for the third quarter, led by a 71.8% plunge in the financial sector's earnings.
"I don't know how John Q. Public is going to react when all these companies announce bad earnings and, to top it off, tell us that things aren't going to get better anytime soon," said trader Mike Mainwald, of Lek Securities in New York.
Veteran traders and money managers said that each day's market drop during the recent losing streak has lead to more selling as investors receive margin calls and hedge funds get redemption orders from their clients. In turn, those players unwind profitable stock to raise cash.
Craig Hester, chief executive of portfolio-management firm Hester Capital Management in Austin, Texas, said that he recently had to liquidate a portfolio worth over $1 million for an investor who had gotten a margin call for losses in an account he had with another firm.
"It was a financial disaster for that client," said Mr. Hester. "I think there's a lot of that going on."
Crude oil rebounded after hitting an eight-month low on Monday. Futures were finished $2.25 higher, up 3%, at $90.06 a barrel in New York.
Gold, which tends tends to benefit when investors are looking for safe havens, posted a solid gain. Futures climbed $15.70, or 1.8%, to $878.40 per ounce in New York. The dollar weakened against the euro, yen, and British pound. The U.S. Dollar Index, which measures the currency's value against a basket of six foreign denominations, was down 0.8%.
—David Gaffen contributed to this article
Write to Peter A. McKay at
[email protected].