Investors bought into some beaten-down bank stocks as the U.S. and British governments signaled they would do more to help the industry.
Health care stocks, one of the better performers on Wall Street lately, led the market lower Thursday after the White House proposed cutting payments to private insurance plans.
The Obama administration's $3.55 trillion budget plan for 2010 includes cuts to Medicare, the government's giant health care program for the elderly, and private health insurance plans serving Medicare seniors would take the biggest hit. As investors became aware of the impact the budget, if enacted, could have on the companies, they turned against what had been one of the strongest industries in the stock market recently.
Banking shares initially pulled much of the market higher as investors welcomed plans from Washington for additional bailout measures that could provide up to $750 billion in support to the struggling banking system. But the Obama administration said the money was for a contingency fund and that it didn't plan to immediately ask Congress to add to the government's existing $700 billion rescue program.
The market's gyrations extended a back-and-forth pattern that began earlier in the week. Market watchers say the sudden shifts reflect indecision among investors rather than big changes in their sentiment over the economy.
"I don't think anybody is comfortable if you're in the market right now. You still have quite a bit of fear driving equity prices," said Bill Knapp, investment strategist for MainStay Investments, a division of New York Life Investment Management.
The Dow Jones industrial average fell 88.81, or 1.2 percent, to 7,182.08. The Standard & Poor's 500 index fell 12.07, or 1.6 percent, to 752.83 and the Nasdaq composite index fell 33.96, or 2.4 percent, to 1,391.47.
The Russell 2000 index of smaller companies fell 8.49, or 2.1 percent, to 392.95.
Declining issues outnumbered advancers by about 8 to 7 on the New York Stock Exchange, where volume came to a light 1.49 billion shares.
Stocks ended a bumpy session down 1 percent Wednesday. The government addressed some questions about banks by confirming it will buy preferred shares from banks that can be converted into common shares, and repeated its position that it does not plan to nationalize banks.
The early pop in hard-hit financial stocks was typical of the reaction of those shares in recent weeks after other financial rescue plans were announced, said Rob Lutts, chief investment officer at Cabot Money Management Inc. in Salem, Massachusetts.
"You get a little bit of a positive reaction and then people look at the reality of it and say 'Wait a minute this doesn't really change anything right away,'" he said.
Financial shares rose on the prospect of further help from Washington and after banks in Europe announced plans to reshape operations.
The Royal Bank of Scotland announced a massive restructuring plan to jettison many of its businesses. The stock jumped $1.24, or 18.8 percent, to $7.83 in New York trading. And troubled Swiss bank UBS replaced its chief executive. UBS rose 88 cents, or 10 percent, to $9.64.
Investors watched for news from Citigroup Inc. The company's effort to boost its equity capital could result in the federal government raising its stake in the bank this week to as much as 40 percent, a person familiar with the talks said.
The company received $45 billion in U.S. bailout money made up primarily of debt-like preferred shares, plus federal guarantees to cover losses on some $300 billion in risky investments. The bank has been in talks with regulators over ways the government could help strengthen the bank still further.
While a deal wasn't likely to be announced Thursday, it could be come within days, the person told The Associated Press late Wednesday, asking not to be named because the discussions are still continuing.
Health stocks fell after the Obama budget proposed slowing growth of Medicare and Medicaid and trimming payments to private insurance plans. WellPoint Inc. fell $3.78, or 9.7 percent, to $35.34, while UnitedHealth Group Inc. fell $2.96, or 12.9 percent, to $20.07. Aetna Inc. fell $3.05, or 11.3 percent, to $24.03.
In other news, General Motors Corp. reported a $9.6 billion loss for the fourth quarter and said it burned through $6.2 billion of cash in the final three months of 2008. Top GM executives were in Washington, D.C., Thursday to meet with the Obama administration's auto task force to talk about restructuring and additional loans. GM fell 17 cents, or 6.7 percent, to $2.38.
Bond prices were mixed Thursday. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 2.99 percent from 2.93 percent late Wednesday. The yield on the three-month T-bill, considered one of the safest investments, fell to 0.27 percent from 0.29 percent Wednesday.