Enthusiasm for the Federal Reserve's actions to stem the credit crunch propelled the Dow Jones Industrial Average to a higher close Monday, a day when everyone expected a rout due to weekend fire sale of Bear Stearns.
U.S. stocks did start off with an initial plunge but the Dow Jones Industrial Average finished with a small gain, buoyed by JP Morgan. The S&P 500 index and Nasdaq closed lower as investors hammered commodities, materials and some financial stocks.
The Chicago Board Options Exchange Volatility Index, the primary barometer of fear on Wall Street, shot up to its highest level in nearly two months.
The dollar dropped to its lowest level against the yen since 1995 and withered against the euro and Swiss franc, reflecting shaky confidence in the U.S. economy and financial system. Stocks plunged in Europe and Asia.
So, why wasn't it worse on Wall Street?
"What's essentially at work here is that people are realizing that, almost no matter what happens ... there isn't going to be financial Armageddon over some large institution failing," said Michael Cohn, chief investment strategist at Atlantis Asset Management. Investors are encouraged by the fact that "the Fed is there and they're going to do what they can."
"I think what's keeping the market from going a lot lower ... is that it has already baked in a substantial number of negatives," said Al Goldman, chief market strategist at A.G. Edwards.
JP Morgan was the Dow's top gainer as investors cheered the investment bank's weekend bargain -- it's paying just $2 a sharefor Bear Stearns, which hit $171 in January 2007. Some analysts point out that Bear's Wall Street real estate alone 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 .
General Motors, the Dow's biggest decliner, hit a new 52-week low. Concerns about demand, lost market share to foreign competitors and a strike at one of the auto maker's key suppliers have weighed heavily on the stock.
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.
Amid all of the central bank's unprecedented and historically rare moves, it begs the question, is the Fed doing enough?
"The message in the market today -- because it didn't collapse -- is that the Fed is doing enough," Goldman said. "The rest is going to take time to shore up confidence in the credit markets."
Cohn agrees that the Fed is pulling out all the stops. "Essentially, the only other alternative is a government fund to take over all of these bad securities," Cohn said. "In the absence of that, yes, I think the Fed is doing everything it can to stem this financial crisis."
Fed-funds futures are pricing in a rate cut of at least three-quarters of a percentage point when the Fed meets tomorrow, and there's a strong contingency that believes it will be more like a whole percentage point.
Among the sectors ticking higher were semiconductors, telecoms, health-care and consumer staples.
Banks also turned higher, with gains in Bank of America , Wells Fargo and US Bancorp .
But investors punished investment-related financials amid concerns that, after the collapse of Bear Stearns, no investment bank is safe. The S&P financials index dropped 1.6 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. The plot will thicken Tuesday as the brokerage reports its quarterly earnings. See a preview of Lehman's report.
Swiss bank UBS has also come under the microscope.
Shares of MF Globalplunged more than 60 percent as the world's largest futures brokerage tried desperately to convince the market that it has enough cash to keep operating, in order to stave off a Bear Stearns-like death spiral. The company said it has no exposure to subprime mortgage backed securities.
Investors also punished financial-execution firms, including Interactive Brokers, E*Trade and TradeStation .
Among other big financial firms, Morgan Stanley declined, even though Goldman Sach suggested that it, along with JP Morgan, has one of the strongest balance sheets in the sector. Citigroup was one of the biggest decliner on the Dow. Merrill Lynch and Goldman Sachs also fell.
Shares of Fannie Mae and Freddie Mac declined after an analyst said both government-sponsored mortgage-finance companies need to raise about $20 billion.
Shares of PMI Group fell sharply after the mortgage insurer reported its biggest ever quarterly loss, citing losses from its investment into bond insurer FGIC, and said it will continue to post losses in 2008. PMI also slashed its dividend by 70 percent.
H&R Block got a boost after billionaire Wilbur Ross agreed to buy the tax preparer'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, homebuilder sentiment remained near historic lowsin March, with the NAHB/Wells Fargo Housing Market index holding steady at 20.
A trio of reports showed the economic slowdown seeping into manufacturing activity. The New York Fed's gauge of regional factory activity dropped to a record low, while the Chicago Fed's measure of midwest manufacturing slipped. Industrial production slipped 0.5 percent in February. Meanwhile, the U.S. current account deficit unexpectedly narrowed in the fourth quarter.
This Week:
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.