No doubt driven by the news that governments around the world are taking unprecedented action to bolster the financial sector, Monday saw Wall Street record its most phenomenal bounce back since the 1930s, with major stock markets around the world enjoying similar positive results. Following one of the worst trading weeks ever, the rally was welcomed with elation by stock market players. While not wanting to put a dampener on the high spirits of investors, the question on the minds of many is likely to be: “Is this going to last?” Given the volatility of the market in recent months, the answer to that is anybody’s guess.
The Dow Jones industrial average recorded its biggest ever one-day point gain by climbing 936 points to close at 9,387 on Monday. This 11 percent rally follows the 18 percent drop experienced by the Dow last week, and while the gain is a significant one, investors are well aware that, even including Monday’s rally, the blue chip index has lost a third of its value over the past year. As a broader measure of the market, the Standard & Poor’s 500 Stock Index ended the day at 1,003, reflecting a gain of 104 points, while Nasdaq experienced a 12 percent rise.
Now that world leaders have signaled their willingness to intervene in the financial sector, and have attached monetary values to their commitment, quick action is needed to put promises into practice. This is what U.S. Treasury Secretary Henry Paulson was doing on Monday afternoon when he met with chief executives from major U.S. banks to discuss and agree upon the most effective bailout strategy. While the initial bailout plan focused on buying up troubled mortgage-related assets to remove them from the balance sheets of embattled financial institutions, it appears that the U.S. government has shifted focus and is looking at using a significant portion of the $700 billion to buy stakes directly in banks. It is anticipated that this direct cash injection will loosen up the near-stagnant lending markets. With U.S. bond markets and banks being closed on Monday for the country’s Columbus Day holiday, it wasn’t possible to gauge the credit market response to the measures being taken, so Tuesday should prove to be interesting in this regard.
Another factor that is sure to influence markets this week is the release of third quarter economic reports on retail sales, consumer prices and corporate earnings, including those of prominent financial firms such as Wells Fargo, JP Morgan Chase, Merrill Lynch, Citigroup and BlackRock.
Certainly Monday’s dramatic stock market rally is cause for a measure of optimism, something which stressed out stock market players are in desperately in need of, but analysts warn that stocks could very well tumble again and investors may want to hold back on breaking out the celebratory champagne just yet.
