NEW YORK – Investors agonizing over whether the stock market is bottoming out or about to extend its precipitous decline face more uncertainty this week as they await action on the government's rapidly expanding effort to pull the financial system from the brink.
If last week was any indication, Washington's medicine has yet to take hold. Wall Street suffered through its worst five-day period in history as investor fears about frozen credit markets deepened and they yanked money out of the markets, sending major indexes tumbling from New York to Hong Kong.
But amid the financial carnage, some saw reason for hope: Friday's trading left the Dow Jones industrials 128 points lower, a relatively tame pullback compared to previous sessions. That left people wondering if confidence could trickle back into turbulent world markets.
With trading in Asia set to begin overnight, U.S. stock futures indicated a sharp rebound is in store for the major indexes ahead of the opening bell on Monday. Dow Jones industrials futures rose 240 points, or 2.87 percent, to 8,601. Standard & Poor's 500 futures jumped 19.25, or 1.50 percent, at 1,309.00; and Nasdaq-100 futures added 22.10, or 2.48 percent, at 913.10.
However, it's far too early to tell how markets will react Monday morning, especially considering the extreme volatility seen in recent weeks. With the U.S. government observing the Columbus Day holiday, closing Treasuries markets, volume could be light.
Investors will be watching this week to see if the Treasury's newly announced plan to buy equity in troubled banks, rather than just their bad assets, is enough to halt the huge losses on Wall Street and revive the lending process that is so vital to the functioning of the U.S. economy.
Treasury Secretary Henry Paulson's latest market-stabilizing try must clear a high hurdle to please investors. Investors so far have barely blinked at a litany of government-led fixes including a globally coordinated interest rate cut, a $700 billion financial rescue plan and the federal bailout of American International Group Inc. and takeover of mortgage lenders Freddie Mac and Fannie Mae.
"We're running out of arrows in the quiver," said Chuck Gabriel, managing director of Capital Alpha Partners in Washington. "There's just not much left after this, and at some point we're going to find a bottom."
Whether or not the process for finding that bottom started last week is a topic for debate among market watchers.
The Dow had its worst week in both point and percentage terms and is down 40.3 percent since reaching a record high close of 14,164.53 on Oct. 9, 2007. In the last eight trading days alone, the blue chip index has lost a staggering 22.1 percent of its value.
Added up, the value of U.S. stocks has tumbled a breathtaking $8.4 trillion in the past year, as measured by the Dow Jones Wilshire 5000 index.
"These are all indicators of a bottoming process," said David Kotok, said chairman and chief investment officer of Cumberland Advisors. "When you see this array of signs at these levels, three to six months later there was a rally under way. I am becoming very bullish strategically because I don't think we're going to have an inflationary Great Depression repeat."
But other experts are less optimistic and say history isn't a very good guide for the current crisis. In the crash of 1987, for instance, the markets absorbed the devastating losses over two days and then began to stabilize. This crisis, however, has played out over several weeks, with each record drop in the Dow seemingly trumping the last.
Steven Goldman, chief market strategist for Weeden & Co., said the gauges he uses to determine a bottom simply can't be applied these days. Watching indicators such as the financial sector's performance, employment numbers, earnings reports or inflation data simply doesn't work amid the chaos coursing through the markets.
"I have hundreds of indicators that I follow, and we're in an environment where standard indicators tested throughout history should not be applied," he said. "We've never seen this kind of volatility, these kinds of declines, and its a market not to be a hero in."
Worries about more volatility this week may have had a hand in the announcement of Paulson's plan to buy equity in troubled banks. The new approach would take a matter of weeks to benefit banks, while the previously announced initiative to buy banks' troubled assets could take months.
Under the plan announced Friday, the Treasury will use authority granted by Congress in the $700 billion bailout to primarily buy nonvoting common or preferred shares of banks. Investors so far have greeted the news with cautious optimism, a marked shift in sentiment that may have helped limit Friday's losses on Wall Street.
In Britain, officials are also drawing up a plan to take major stakes in the Royal Bank of Scotland, Lloyds TSB and HBOS under a $500 billion financial rescue. At a meeting Sunday of European leaders, the continent's single-currency zone agreed to temporarily guarantee bank refinancing and pledged to prevent banks failing as part of a raft of emergency measures designed to get credit flowing again.
Sen. Chuck Schumer, D-N.Y., chairman of the Joint Economic Committee, said the proposal to inject federal money directly into certain banks "is gaining steam."
"I am hopeful that (Monday), the Treasury will announce that they're doing it. And they have to do it quickly. ... Markets are waiting," Schumer said.
Some questions do remain about how quick banks will be to sell stock to the government, analysts said. Most of the nation's banks remain well capitalized, but those that are struggling might try at least in the short term to manage their way out of balance sheet problems.
"What banker, if they can avoid it, wants to have the federal government as its partners after witnessing the results over the past year?" Kotok said. "You'd instruct your management to do everything you can to avoid it, and only folks that would want them as a partner are the ones who have no other choice."
He said bank CEOs would not want to "gravitate toward fast recognition of losses" by prematurely going to the government without trying to solve problems on their own. Getting capital from the government might undermine the financial company's management and make shareholders nervous.
Instead, banks without drastic problems would likely wait out the financial crisis and hope the markets begin to turn around. There are also still have a number of tools, such as borrowing money directly from the Federal Reserve, that financial institutions can employ to shore up their balance sheets.