Stocks Jump after Government Bailout of Citigroup
November 24, 2008 - 3:13 PMWall Street showed clear relief Monday over the government's plan to bail out Citigroup Inc. - a move it hopes will help quiet some of the uncertainty hounding the financial sector and the overall economy. The major indexes jumped more than 2 percent, extending Friday's big rally.
While the markets anticipated last week that some sort of rescue could occur, investors appeared emboldened by the U.S. government's decision late Sunday to invest $20 billion in Citigroup and guarantee $306 billion in risky assets.
The market came off its highs of the session, with the Dow Jones industrial average paring its gain from 300 points to 200 points, as President-elect Obama formally named his economic team but didn't offer specifics of an economic stimulus plan nor state that he would push back a plan to raise taxes on the richest Americans. His plan targets saving or creating 2.5 million jobs during the next two years.
Alan Lancz, director at investment research group LanczGlobal, said that while the market might have wanted a firmer commitment against raising taxes it was too soon for Obama to nail down specifics of his plan. Lancz expects the new administration wouldn't rush to implement the hikes with an economy as weak as it has been.
"There's so many balls in the air right now he'd be foolish to make specific comments," Lancz said, noting that the economic picture could change greatly by inauguration day.
The market rallied following announcement of the plan by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp. to stabilize Citigroup. It's only the latest effort this year to support a banking system troubled by bad debt and flagging confidence. Besides implementing its $700 billion bailout plan for the overall financial industry, the government has bailed out insurance giant American International Group Inc. and taken over lenders Fannie Mae and Freddie Mac.
Still, despite the size of Monday's gain, investors remain cautious because the nation faces a difficult economy and the stock market likely will continue to see volatility.
Jim Baird, chief investment strategist with Plante Moran Financial Advisors, said Wall Street is relieved by the government's decision to help prop up Citigroup but he predicted that the initial enthusiasm could give way to further questions about the effectiveness of the government's array of efforts to sew up problems in the financial sector.
"I think, at a minimum, what you're seeing today is some relief that, first of all, they're stepping in to do something," he said. "There's still more questions than answers surrounding whether what's been done is going be enough."
In early afternoon trading, the Dow rose 214.33, or 2.66 percent, to 8,260.75.
Broader stock indicators also jumped. The Standard & Poor's 500 index advanced 32.30, or 4.04 percent, to 832.33, and the Nasdaq composite index rose 48.32, or 3.49 percent, to 1,432.67.
The Russell 2000 index of smaller companies rose 17.99, or 4.43 percent, to 424.53.
The rise in stocks follows a rally Friday that saw the Dow industrials jump 494 points, or 6.5 percent. The other major indexes also rose sharply. Still, stocks ended the week with a loss after heavy selling Wednesday and Thursday.
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