Volatility ruled on Wall Street today, with the Dow Jones industrial average swinging in a nearly 800-point arc before settling sharply higher as investors picked up bargains and looked for bright spots.
The blue chip barometer closed up 401.35, or 4.7%, at 8,979.26, after investors stormed back into stocks in afternoon trading. The industrial average had dropped almost 400 points earlier in the day. The S&P 500 rose 38.59, or 4.3%, closing at 946.43; and the Nasdaq composite was up 89.38, or 5.5, to close at 1,717.71.
The Dow Jones Wilshire 5000 index rallied 389.01 points, or 4.3%, to close at 9,549.42, representing a $500 billion increase in market cap. Still, for the month of October, the index remains down 19.6% or about $2.8 trillion.
Investors who are in the market now and there are some out there are more risk-averse and theyre looking for some sense of stability amid the turbulence, said Matthew D. McCormick, a portfolio manager at Bahl & Gaynor Investment Counsel Inc. in Cincinnati. If theres going to be a rally and a base made, quality companies with earnings stability are going to be the types of shares that are going to lead.
For example, Mr. McCormick cited the likes of drug maker Johnson & Johnson Inc., fast-food chain McDonalds Corp. and consumer goods maker Procter & Gamble Co. Shares of those companies were among the Dows biggest gainers today, with J&J up 5%, McDonalds gaining 6% and P&G adding 3%.
I still believe earnings estimates are too high and anyone who expects to see strong earnings growth in this environment, I believe, is going to be disappointed, Mr. McCormick added. But if you do get a pop in earnings, its likely to come from high-quality names.
Earnings are coming into focus as more companies report third-quarter numbers. Earlier today, Merrill Lynch & Co. and Citigroup Inc. posted third-quarter losses, with Merrill losing more money than expected but Citigroup matching most estimates. Bank of New York Mellon Corp. reported a 53% drop in third-quarter earnings but beat expectations. Technology bellwether IBM Corp. reported a nearly 20% increase in third-quarter earnings, topping forecasts.
In one clear sign of investors anxiety, the Chicago Board Options Exchange volatility index, or VIX, rocketed to an all-time high of 81.17 today as U.S. equities continued to search for direction. The spike in the fear gauge reflected a split in market sentiment between hopes for lower U.S. interest rates and fears about the economic outlook.
The VIX pulled back to 72.30 in late-afternoon trading as the stock market recovered from early losses tied to a 6% drop in industrial production in September, the sharpest decline since 1991.
Also, the Federal Reserve Bank of Philadelphias regional manufacturing index fell to -37.5% in October from 3.8 in September. The New York Feds Empire State index for regional business activity, released today, fell by a record as well in October. Due to a tame reading on inflation in September, market participants expect Fed officials to lower the federal funds rate to 1% from 1.50% when they next meet Oct. 28-29.