NEW YORK — Wall Street recovered from steep losses Wednesday amid hopes for an imminent interest-rate cut, but stocks still closed down in response to Merrill Lynch & Co.’s credit-related losses and a sharp drop in existing-home sales.
The Dow Jones industrials fell 200 points in morning trading after the market got one of its most feared scenarios: Not only is the housing implosion hurting corporate profits, it appears to be accelerating.
But the blue-chip index reversed direction later in the day, briefly bobbing into positive territory as rumors circulated that the Federal Reserve – scheduled to meet next week – might lower the discount rate before then. The central bank has also been adding a substantial amount of liquidity to the financial system over the last three days.
“Once people hear about a rumor, they cover their shorts. Even though it’s just a rumor that’s out there,” said Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research.
Short-covering is when traders undo bets that the market is going to fall.
“There was a lot of bad news this morning. It’s pretty clear Wall Street wants a rate cut and wants it soon,” Detrick said.
Investors have been clamoring for a cut with fresh evidence that the housing slump and summer’s credit crisis continue to drag on the economy. Merrill Lynch said it wrote down $7.9 billion from its exposure to mortgage-related securities, while a new housing report showed existing-home sales plunged last month.
The Dow was off just 0.98, or less than 0.01 percent, at 13,675.25.
The Standard & Poor’s 500 index fell 3.71, or 0.24 percent, to 1,515.88, while the technology-dominated Nasdaq composite index lost 24.50, or 0.88 percent, to 2,774.76.
Speculation about an emergency meeting of Fed governors rippled through Wall Street in the late afternoon and caused stocks to rebound. However, such a meeting seemed unlikely given that the Fed meets next week to decide whether to lower interest rates to make borrowing cheaper.
“The market wouldn’t want to hear that Fed was turning a blind eye to the news flow,” said Jeff Kleintop, chief market strategist at LPL Financial Services in Boston. “They want to hear more signs that the Fed is noticing this weakness.”
Meanwhile, investors kept a close watch on oil prices to gauge inflation. Oil resumed its climb after a surprise drop in inventories, with a barrel of light, sweet crude up $1.83 at $87.10 on the New York Mercantile Exchange.
The financial sector was among the hardest-hit Wednesday after Merrill reported a worse-than-expected loss of $2.3 billion.
