Volatile Session Mostly Recovers

Stocks plunged Wednesday, then recovered most of their losses, in a volatile session triggered by WorldCom Inc.’s disclosure of an allegedly massive accounting fraud.

Coupled with the day’s heavy trading volume--the New York Stock Exchange had its busiest session this year--the dramatic turnaround raised hopes that the market may have reached at least a near-term bottom after five straight weekly declines, analysts said.

The Dow Jones industrial average was down nearly 200 points at its low, then resurged to close with a loss of 6.71 points, at 9,120.11.

The Nasdaq composite index and the Standard & Poor’s 500 both traded below their three-year closing lows reached Sept. 21, but recovered to finish nearly even on the day. The Nasdaq index posted a net gain of 5.34 points to 1,429.33 after falling as low as 1,375.53, a level last seen in October 1998.

The S&P; eased 2.61 points to 973.53 after falling to 952.92.

The heavy selling at the outset reflected investors’ exasperation with WorldCom’s disclosure, the latest in a string of scandals engulfing corporate America.

Traders described the market scene early in the day as overrun with fears that WorldCom’s bombshell may be followed by a new wave of financial frauds.

“Investors are saying, ‘What else is next? Who can you trust?,’ ” said Ned Riley, chief investment strategist at State Street Global Advisors.

But buyers began to return to stocks in droves in the final 90 minutes of trading.

Analysts said there was no specific catalyst for the rebound, though the Federal Reserve’s announcement that it is holding short-term interest rates at 40-year lows may have soothed some investors--even though the central bank’s decision had been expected.

The Fed, in its announcement after a two-day meeting, said the economy continues to recover, but that the pace may be moderating.

Wall Street optimists say the stock market has been distracted from the improving economy by the barrage of corporate scandals.

But with key indexes down sharply this year even as the economic outlook has improved, some analysts see stocks strengthening soon--if investors begin to make decisions based on economic realities rather than fear of the next corporate accounting debacle.

“We are seeing the peak of market anxiety right now, “ said Subodh Kumar, chief investment strategist for CIBC World Markets in New York. “However, the economy is improving and I think we are bottoming out.”

General Electric on Tuesday said it’s on track to meet analysts’ earnings estimates for the second quarter. The stock rose 78 cents to $29.50 on Wednesday after falling as low as $27.42.

Also, Colgate-Palmolive predicted double-digit earnings growth in the second quarter. Its shares jumped $1.71 to $49.66.

Major mutual fund companies said some investors have expressed concern about WorldCom in calls to fund offices. But the firms said they have not seen a wave of redemptions from their stock funds this week.

At Charles Schwab Corp. in San Francisco, which runs a supermarket of mutual funds, spokesman Greg Gable said the “heightened sense of caution” of the last several months has continued.

Some analysts cautioned that the turnaround Wednesday stemmed partly from technical factors. For example, “short covering”--buying by traders who had previously sold borrowed shares, betting on lower prices--may have helped stoke the late rebound.

Although key market indexes ended nearly flat, declining issues outnumbered advancers by 19 to 14 on the New York Stock Exchange and by 21 to 14 on Nasdaq.

Some traders said the market’s ongoing problem is as much a lack of interest by potential buyers as it is a desire by others to sell out.

“This is a slow death due to a very skeptical investor base. They are just waiting it out,” said Jack Francis, managing director and head of Nasdaq trading at UBS Warburg. “This is a sick market.”

Others point to still-high price-to-earnings ratios on many stocks, even as prices have dropped this year.

Foreign investors weary of ongoing U.S. accounting scandals and doubtful about the nation’s economic growth potential contributed to the early decline Wednesday, analysts said. The U.S. dollar slid further against the euro, though it recovered much of its losses by the close. The euro ended at 98.6 cents in New York, up from 97.8 cents Tuesday.

Asian markets were the first to react to the WorldCom news Wednesday. In Tokyo, the Nikkei-225 index sank 4% to 10,074.56. South Korea’s main index slumped 7.2%.

European markets also were mostly lower. The German market fell 2.5%, and the British market lost 2.2%.

On Wall Street, WorldCom shares never opened for trading Wednesday, but companies with any ties to WorldCom, such as telecom gear suppliers and banks, saw their stocks tumble even though most rushed to calm investors fears, saying their exposure would be limited.

Lucent Technologies said WorldCom is a “minor customer,” but Lucent shares still fell 39 cents to $1.58. Among other telecom equipment firms, Nortel Networks was off 14 cents to $1.47 and Tellabs lost 57 cents to $5.78.

Among other telecom services firms, Qwest Communications plummeted $2.40 to $1.79 on worries about its accounting, while AT&T; slid 33 cents to $9.62.

Concern that banks with billions in loans to WorldCom could suffer if the firm files for bankruptcy sent shares of J.P. Morgan Chase down $1.44 to $31.49 and Citigroup down $2.12 to $37.

Although some analysts predicted the market would continue to make gains for the rest of the week, the outlook for the rest of the summer remains uncertain. Another terrorist attack against America or another major accounting scandal could keep the market depressed for months to come, some said.

“That could send us back to new lows,” Riley said.

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Staff writer Josh Friedman contributed to this report.

Market Roundup, C8-9