The Dow Jones Industrial Average pared its losses Monday as the sell-off spurred by the fire sale of Bear Stearns wasn't as bad as expected.
The Dow Jones Industrial Average was down about half a percentage point -- and even tip-toed into positive territory at one point -- after plunging more than twice that at the opening bell. The S&P 500 index and Nasdaq, however, were down more than 1 percent as investors worried about other firms to drop as a result of the credit crunch.
JP Morgan was the Dow's top gainer following news that the investment bank is paying just $2 a sharefor Bear Stearns, an unbelievable bargain, particularly when you consider that the stock was trading at a whopping $171 a share in January 2007. Some analysts point out that even Bear's real estate is worth more than $2 a share. The deal, announced late Sunday, values the fifth-largest U.S. investment bank at $236 million, one-fifteenth of its market value on Friday.
Among other blue chips pulling up the Dow were telecoms Verizon and AT&T , and health-care stocks such as Merck and Johnson & Johnson .
The Fed agreed to provide $30 billion of special financing to JP Morgan, to back some of Bear Stearns less liquid assets, which means if the assets decline in value, the Fed would take the hit, not JP Morgan.
Also late Sunday, the Fed lowered its discount rate, the rate at which it lends directly to banks, by a quarter percentage point to 3.25 percent. The central bank also set up a program to provide cash to investment banks, something it hasn't done since the Depression, nearly 80 years ago.
"This is going to get worse the longer the market prolongs the inevitable," Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, N.J., told Reuters. "With all these discount rate cuts, it seems like the Fed is running out of silver bullets. Maybe they have to come up with something bigger."
The dollar plunged to new lows following the news, prompting speculation that central banks around the world might step in to prop the ailing currency. Oil and gold hit new record highs as investors fled to safety.
The news roiled world markets, with sell-offs across Asia and Europe, but it's worth keeping it all in perspective.
"Coming out of this, someone's going to win," Brian Belski, chief U.S. sector strategist at Merrill Lynch, told CNBC.
"There has never been a period in the United States' history -- economics and the stock market -- that we didn't come out of it, "Belski said. "It's just going to take time .. It's just a matter of where to buy and clearly investors have been too early to try to get in."
Among the sectors ticking higher were semiconductors, telecoms, health-care and consumer staples.
Still, investors hammered financials, ex-JP Morgan, amid concerns that other investment banks will collapse under the weight of the credit crunch. The S&P financials index dropped more than 4 percent.
"The fall of Bear Stearns was pretty much a victory for the rumor mongers, and that means possibly nobody's safe," Art Cashin, director of floor operations at UBS Financial Services, told CNBC. "They'll be rumors around about anybody ... they'll see if they can cause a run wherever they are."
Lehman Brothers plunged more than 20 percent amid rumors that it might be the next domino to fall. Swiss bank UBS has also come under the microscope.
Among other big financial firms, Morgan Stanley declined, even though Goldman Sach suggested that it, along with JP Morgan, had one of the strongest balance sheets in the sector. Citigroup was the biggest decliner on the Dow. Merrill Lynch and Goldman Sachs also declined.
Goldman Sachs is expected to announce asset writedowns of $3 billion when it posts earnings on Tuesday, Britain's Sunday Telegraph newspaper reported, without naming sources and adding it was likely to report a fall of about 50 percent in first-quarter earnings.
And mortgage fund Carlyle Capital, an affiliate of Carlyle Group, said on Sunday its shareholders have voted unanimously in favor of a compulsory winding up.
Fed-funds futures now price in a full one percentage point cut in the Fed's main interest rate at its meeting tomorrow.
Billionaire Wilbur Ross agreed to buy H&R Block's mortgage-loan-servicing business, Option One Mortgage, for $1.1 billion.
Humana jumped after Hilliard Lyons raised its rating on the stock to "buy" from "neutral." Last week, Humana sharply lowered its full-year outlook, but analysts noted that it was a matter of mispricing of a Medicare-prescription plan, not as a result of broader problems affecting the health-care sector.
Coventry Health Care , however, skidded after the HMO lowered its outlook, citing higher-than-expected costs related to the flu. The number of flu cases shot up in January as new strains emerged.
In economic news, the Empire State Manufacturing Index dropped to a record low of minus 22.23 in March from minus 11.72 in February, the New York Federal Reserve reported. Economists had expected an improvement to minus 8. This regional report from New York is watched closely as one of the precursors to the national reading on manufacturing from the Institute for Supply Management.
Industrial production dropped at the sharpest rate in four months during February and the nation's mines, factories and utilities ran at their slowest rate in more than two years, the Federal Reserve said. Total industrial output fell 0.5 percent, much steeper than the 0.1 percent drop economists had expected.
The U.S. current account deficit unexpectedly narrowed in the fourth quarter to $172.9 billion from a downwardly revised $177.4 billion in the third quarter, the Commerce Department reported.
This Week:
MONDAY: David Paterson to take over as NY governor; Chicago Fed manufacturing report; NAHB housing report
TUESDAY: Fed meeting; Earnings from Goldman, Lehman; PPI; Housing starts
WEDNESDAY: Morgan Stanley earnings; Visa IPO; Crude inventories; New York Auto Show
THURSDAY: Weekly jobless claims; Philly Fed report; FedEx earnings; Bond market closes early
FRIDAY: Financial markets closed for Good Friday holiday
Send comments to cindy.perman@nbcuni.com.