Published: October 27, 2008 10:53 am      

Stocks fluctuate as investors weigh economy

NEW YORK — Stocks fluctuated Monday as investors tried to determine how the government’s efforts to prop up the banking sector and aid the economy might help stave off a protracted global recession.

Investors around the world are nervous that the evaporation in available credit in the past month has hurt lending to the point where it will be difficult to avoid recession. But the U.S. government is implementing some of its measures this week to help the banking sector, including a plan to purchase stakes in banks.

Beyond that, investors were cheered after sales of new homes last showed an unexpected increase in September. While median home prices have dropped to the lowest level in four years, investors appeared pleased that the market was beginning to chip away at an inventory glut. The Commerce Department reported that sales of new single-family homes rose by 2.7 percent in September to a seasonally adjusted annual rate of 464,000 homes. Economists had expected sales would drop from August.

The median price of a new home declined by 9.1 percent from a year ago to $218,400, its lowest level since September 2004.

News that the Treasury plans to start distributing money to major banks this week is offering investors some room for optimism, even as economic worries remain. But investors are worried that the credit crisis has hurt the world’s economy.

“Clearly, what’s most important is that the funding crisis needs to be contained at this point,” said Chris Orndorff, director of equity strategy at Payden & Rygel in Los Angeles.

“The banks need to start taking on some more risks,” he said. “I think it’s going to take months.”

In midmorning trading, the Dow Jones industrial average fell 53.84, or 0.64 percent, to 8,325.11.

Broader stock indicators also fell. The Standard & Poor’s 500 index declined 8.41, or 0.96 percent, to 868.36, and the Nasdaq composite index fell 20.13, or 1.30 percent, to 1,531.90.

The Russell 2000 index of smaller companies fell 5.24, or 1.11 percent, to 465.88.

But even with several pieces of welcome news, investors around the world remain worried about the prospects for economic expansion. A surge in the yen illustrated investors’ nervousness about how much economic activity could slow. Japan’s Nikkei 225 index dropped to its lowest close in 26 years as investors worried that the high yen will hurt Japanese exports and further disrupt economic activity. The currency moved to the 93 yen level and near 13-year highs. The yen is seen as a safe haven holding for investors who contend the Japanese economy will fare better in a global recession.

Wall Street appeared comforted by the Treasury’s announcement that it signed agreements with nine banks and will buy stock in the companies this week. The proceeds from the stock sales are intended to bolster the banks’ balance sheets so they will begin more normal lending and help ease the continuing credit crisis.

The market is facing the uncertainty as it awaits the start of a regularly scheduled two-day meeting of the Federal Reserve. There is speculation that the world’s major central banks could announce coordinated rate cuts; the Fed is expected to lower its fed funds rate by a half-point to 1 percent on Wednesday.

The ongoing selling is due in part to the belief that a worldwide recession is likely inevitable, but it’s also being triggered by hedge funds and other investors unloading stock because they’re being hit by margin calls. In a margin call, a broker who lent money to an investor calls in the loan, forcing the investor to sell stock to repay the loan.