Stocks Finish With Surprise Bounce

NEW YORK (TheStreet) - Stocks finished a choppy trading session sharply higher on Tuesday as the prospect of a new plan to recapitalize European banks fueled a furious rally in the final hour.

The Dow Jones Industrial Average saw a nearly 400-point turnaround, surging from 10,432 shortly after 3 p.m. ET to settle up 153 points, or 1.4%, at 10,809 when the closing bell sounded.

The S&P 500 finished up 25 points, or 2.2%, at 1124. The index dropped into bear market territory during the session, touching a one-year intraday low of 1,075 in the morning that put the index down 21.4% from the year's closing high of 1,364 in late April. The tech heavy Nasdaq gained 67 points, or 3% at 2405.

What seemed like a rally after a morning speech by Federal Reserve Chairman Ben faded by the afternoon. The three major averages were languishing in negative territory prior to the turnaround that followed a Financial Times report that European finance ministers are debating ways to cooperate and recapitalize eurozone banks.

U.S. banks, battered in recent days, led the turnaround with Morgan Stanley (MS), Goldman Sachs (GS) and Bank of America (BAC) all climbing into the positive territory by the close.

"Positive European headlines have been few and far between and ultimately, today's rally was spurred by a headline and not the actual implementation of a policy decision," wrote Dan Greenhaus, chief global strategist from BTIG. "If we can rally off of the former, imagine what the latter might do?"

Earlier, Bernanke left the door open to further fiscal policy in his prepared remarks to the Joint Economic Committee, although he also said the central bank has no imminent plans for a third round of quantitative easing. His remarks echoed Wall Street's frustrations that Washington and eurozone leaders have not done enough to address the sluggish state of the global economy.

"Whenever the Fed chairman makes a statement to help, the stock market usually sees a bounce," says Komal Sri-Kumar, chief global strategist at the investment firm TCW. He noted that the rally that immediately followed Bernanke's speech today was especially short because investors have lost faith in the ability of monetary easing to help the economy.

Before the late-day news that seemed to stick another "band-aid" on Europe's debt problems, the focus was largely on a latest string of disappointing news from the region. European leaders said they have pushed back their decision regarding additional aid to Greece after Oct. 13. The decision increased fears that Greece may not receive its next installment of bailout funds after the country announced it will not meet its deficit reduction target for 2011. Most analysts believe that Greece is headed toward an orderly default or some sort of restructuring debt plan.

European bank stocks plummeted Tuesday as investors sought to minimize their exposure to continued uncertainty in the eurozone. London's FTSE lost 2.6%, and Germany's DAX sunk 3%. Japan's Nikkei Average closed off by 1.1%, and Hong Kong's Hang Seng dropped 3.4%.

Also on Tuesday, Goldman Sachs slashed its global growth outlook for 2011 and 2012, projected a mild recession in the eurozone area. Goldman now anticipates global growth of 3.8% in 2011 and of 3.5% in 2012, compared with earlier estimates for growth of 3.9% and 4.2%, respectively, according to a Bloomberg report.

"Rarely has the economic outlook been so sensitive to the decisions of politicians on both sides of the Atlantic," Deutsche Bank economists said in a note. "Whether it is the complexities of reaching unanimous agreement among 17 euro area members regarding the resolution of the sovereign debt crisis or the increasingly polarized U.S. political scene, political risk may be the greatest source of shocks to the global economy today."

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