NEW YORK The opening bell hadn't even sounded on Wall Street when the Federal Reserve announced an emergency interest-rate cut. The Dow Jones industrial average fell 465 points including 300 in the first minute then rebounded to finish down a more bearable 128.
The recovery Tuesday was a victory of sorts for a battered market. But a long-term comeback may depend on factors much more difficult to achieve a turnaround in the housing market and renewed confidence among U.S. consumers, who hold up most of the economy.
The alarming early drop in U.S. stocks followed the lead of markets abroad, where investors fled stocks and sent indexes plummeting on fears of a U.S. recession that could spread to other global economies.
By the close, the Dow had recovered to a loss of 128.11, or just over 1 percent, at 11,971.19.
Before trading began, the Federal Reserve moved to slash its benchmark federal funds rate by 0.75 of a percentage point to 3.5 percent. It was the widest cut since 1990, the beginning of what the Fed says is a comparable period in the way it handled the rate.
The Fed cut the discount rate, the interest rate the Fed charges banks directly, to 4 percent, also a three-quarter-point cut.
Many traders had anticipated a rate cut, but it was unusual for the Fed to make the call between regularly scheduled meetings of its policy-making Open Markets Committee.
The next meeting is a week away, and even then, most traders were expecting a cut of only a half-point.
The market pulled back a bit from its steep plunge the Dow had fallen 277 points on Tuesday of last week, and 307 on Thursday. It was a positive sign, but economists and analysts said a full recovery was not likely in the near term.
"This is a cure for the wrong disease. It makes everybody feel good, but it's not going to have any ongoing benefit," said Daniel Alpert, managing director of Westwood Capital LLC. "We need to get ourselves out of a mountain of debt and overvalued properties."
The markets worry that consumers, who account for two-thirds of economic activity, are not in a position to spend the country back into solid growth. They have been cutting back rather than borrowing or spending more, even during the recent holiday season.
"People are up to their eyeballs in debt, and they're being asked to borrow more," said Mike Schenk, senior economist for the Credit Union National Association.
Interest rate reductions are one strategy the Fed has used in previous crises to help the economy recover. A rate cut tends to spur the economy by making it cheaper for businesses to borrow money.
It would also lighten the burden on individuals with credit card debt and with mortgages that have adjustable rates.
Still, the effect on Wall Street was not overwhelmingly positive: The Standard & Poor's 500 index, the broad market measure most closely followed by traders, fell 14.69, or 1.11 percent, to 1,310.50, while the Nasdaq composite index lost 47.75, or 2.04 percent, to 2,292.27.
Stocks have been beaten down for months amid falling housing prices and a mortgage crisis that began with a stream of failed home loans to consumers with poor credit.
The Dow is down nearly 10 percent since the beginning of the year logging its worst first 14 trading days of the year ever. It is down more than 15 percent since its record close of 14,164.53 on Oct. 9, and is at its lowest close since Oct. 17, 2006.
Investors are well aware that housing worries remain: Many adjustable-rate mortgages similar to those that went bad last year will still be adjusted higher, and home prices are expected to keep falling this year.
Financial companies have lost billions of dollars because of those mortgages, retail sales are falling and companies in general aren't on a spending spree.
Investors, both institutional and individual, are also in a defensive mode, and an interest cut won't immediately change that. In the week ended Jan. 15, when many on Wall Street believed a rate cut was in the offing, investors shoveled money into cash reserves at a record pace, according to iMoneyNet. Assets in money market funds ballooned by $15.96 billion to a high of $3.17 trillion.
And investors pulled an estimated $18.2 billion out of mutual funds, according to TrimTabs Investment Research. So far this year, investors have shifted $41.4 billion out of these investments.
Richard Resch, a 60-year-old salesman at a steamship company, said he met two nights ago with his financial planner to rebalance his money from an 80-20 split in stocks and bonds to a more conservative 50-50 split. His planner told him to hang in there.
"There's no point in panicking now," said Resch, who lives in Long Valley, N.J. "If you see me jump out of a window six months from now, you'll know I was wrong."
For the market to truly gain a foothold, investors need to see strong economic and earnings data in the coming months, including earnings reports and forecasts this week from big multinational companies like Microsoft Corp., AT&T Inc., Caterpillar Inc. and Honeywell International Inc.
The market also needs to hear that financial institutions like Citigroup Inc. and Merrill Lynch & Co., which have lost billions due to investments in failed mortgages, are on their way to solid earnings as well.
"If that doesn't happen, then all this is a short-term bottom before a resumption of selling," said Peter Boockvar, equity strategist at Miller Tabak.
The pack mentality of Wall Street could be the market's biggest driver it's what triggered comebacks in the past, and one reason experts say long-term investors should sit tight.
When investors feel the market has indeed gone as low as it should, they'll start buying, even if the economy is not yet barreling higher.
Still, a recovery might take months or years. After the technology bust of 2000 and the 2001 terrorist attacks sent Wall Street into a deep bear market, the market took several years to turn around and at that time, Americans had something sure, something physical, to put their money and confidence in: their homes.
That economic pillar, which helped support spending, has cracked. People who took out giant mortgages with tiny down payments, or who used their homes' value to borrow money, no longer have the security of home equity amid a slumping housing market.
And banks that were burned writing mortgages for consumers with shaky credit are now wary of lending, especially since other types of consumer debt, including car loans and credit cards, are seeing defaults rise.
The Bush administration has proposed ways to ease Americans' plight, first with a plan to prevent more mortgages from going sour, and, last week, with an economic stimulus packing that included $145 billion in tax cuts. On Tuesday, the White House said President Bush won't rule out the possibility of a larger package.
But like interest rate cuts, a stimulus package, which would first need the approval of Congress, would not work immediately.
"Economists are not generally impressed by a fiscal stimulus, because it takes a long time to produce the desired effect," said the Credit Union National Association's Schenk. He explained that some people shrewdly would save the money they receive instead of spend it.