NEW YORK – Stocks pared their losses in a stunning turnaround Wednesday, led by buyers seeking well-priced shares after a steep selloff triggered by phone group WorldCom (WCOM)'s $3.8 billion accounting scandal.
Wall Street initially pushed the panic button and indexes tested lows unseen since September, but stocks recovered late in the afternoon as investors picked up a slew of beaten-down shares.
The blue-chip Dow Jones industrial average lost 6.71 points, or 0.07 percent, at 9,120.11, after posting triple-digit losses in the early going. The technology-packed Nasdaq Composite Index gained 5.43 points, or 0.38 percent, to 1,429.42, after plunging as low as 1,375.53, an intraday trough unseen since Oct. 8, 1998.
The broader Standard & Poor's 500 Index lost a modest 2.60 points, or 0.27 percent, to end at 973.54.
"A lot of people are surprised that the market has held up, many were looking for capitulation-type selling in the morning leading into midday, to get S&P and Nasdaq to key support technical levels at 965 and 1,420," said Tim Anderson, a trader at Salomon Smith Barney Inc. "But as these levels held, buyers came into the market."
In what could be one of the biggest cases of accounting fraud in U.S. history, WorldCom, the No. 2 U.S. long-distance telephone and data services firm, said it would restate its results for 2001 and the first quarter of 2002 to show net losses.
WorldCom's admission initially rocked stocks around the globe and pounded the U.S. dollar. By contrast, the Federal Reserve's decision to leave interest rates unchanged early Wednesday afternoon made barely a ripple.
"We had buyers from the get-go all day long. When there are dislocations to the downside, there are value buyers. The valuations are better," said David Memmott, head of listed block trading, Morgan Stanley.
The Fed kept interest rates at 40-year lows, as expected, amid a backdrop of soft economic growth and weakness on Wall Street. The central bank's decision was overshadowed by worries about the trustworthiness of corporate accounting after the disclosure of WorldCom's balance sheet mess, the latest in a long list of scandals that began with the implosion of energy trading giant Enron Corp. last year.
In its statement, the Fed said it saw demand picking up but that the degree of strengthening remained uncertain. It said risks were equally balanced between recession and a flare-up in inflation, a stance unchanged from the last meeting on May 7.
The stock market has been in a deep funk ever since the Enron demise, nicknamed "Enronitis" by Wall Street traders. A case of "WorldCon" may become the next catch phrase to describe Corporate America's shenanigans and the downtrodden stock market.
"The stock market has become the equivalent of taking someone to go gambling at a crooked race track," said Charles White, president of investment firm Avatar Associates. "When people don't believe the game is fair they don't play. That's the crisis of confidence that we're wrestling against."
The bombshell dropped by the telephone company reverberated from Wall Street to Main Street.
"This WorldCom thing really makes you wonder, how many other skeletons are there in the closet?" said Bob Glaser, who works in advertising sales for a company without a retirement plan. Glaser, 40, has two daughters he must put through college.
Investors worry that WorldCom could face the same fate as Adelphia Communications Corp.(ADLAE), the troubled cable television operator which filed for bankruptcy protection on Tuesday amid regulatory and criminal probes of its accounting.
Stocks have been hammered in recent weeks by a long list of worries -- sketchy accounting practices, tepid corporate profit prospects, a weakening U.S. dollar, political turmoil overseas and fears of another attack in the United States.
WorldCom's shares sank to 9 cents on Instinet in pre-market trading from a Tuesday close of 83 cents before the Nasdaq market halted trading in the issue. The shares did not trade during the regular session.
Other telecoms-related shares, like No. 4 U.S. local telephone company Qwest (Q) Communications International , were also hit hard. Qwest, which is currently under investigation by federal regulators for its accounting methods, fell $2.40, or 57 percent, to $1.79.
The American Stock Exchange's North American telecommunications index lost 6.86 percent.
Banking stocks were also battered amid concerns banks with loans to WorldCom could take a hit. J.P. Morgan Chase & Co. (JPM), the No. 2 U.S. bank holding company, fell $1.44 to $31.49, while Citigroup Inc. (C), the No. 1 U.S. financial services company, lost $2.12 to $37. Both weighed the Dow.
Telecom gear suppliers whose stock prices were hit hard rushed to announce they had limited exposure to WorldCom.
Lucent Technologies Inc. (LU) said WorldCom is not even among its top 20 customers and its exposure is mainly through that company's UUNET business. Still, Lucent tumbled 39 cents to $1.58, or 19.8 percent. Among others, Nortel Networks (NT) was off 14 cents at $1.47, or 8.7 percent.
Tyco International (TYC) extended losses, and was down $1.58 at $11.97. The conglomerate is embroiled in its own accounting troubles with a botched restructuring plan and probes by U.S. regulators. It was the New York Stock Exchange's second most actively traded stock.
In the latest earnings news, Micron Technology Inc. (MU), the No. 2 maker of computer-memory chips, fell 3.8 percent after it reported an unexpected quarterly loss amid a sudden decline in memory-chip prices. Micron was down 75 cents to $19.
Declining issues outnumbered advancers 5 to 3 on the New York Stock Exchange. Volume was heavy at 1.99 billion shares, ahead of Tuesday's 1.50 billion.
The Russell 2000 index, the barometer of smaller company stocks, rose 0.52, or 0.1 percent, to 452.97.
Overseas, stocks fell sharply Wednesday with Japan's Nikkei stock average finishing down 4.0 percent. In Europe, France's CAC-40 lost 1.7 percent, Britain's FTSE 100 sank 2.2 percent, and Germany's DAX index fell 2.5 percent.
Reuters and the Associated Press contributed to this report.