Brushing a bear

Stocks nearly fell into a bear market Tuesday before clawing back as investors digested news of the Federal Reserve's surprise interest-rate cut.

The Standard & Poor's 500 index sank to an intraday low of 1,274.29, off 19.1 percent from its high of 1,576.09 on Oct. 11, 2007. It closed the day at 1,310.50.

A bear market is commonly defined as a drop of 20 percent or more from the previous high, which would occur if the S&P had hit 1,260.

A bear market is not the same as a recession — and it doesn't always coincide with one. But by eating away at savings, it could make consumers cut back on spending, which drives more than two-thirds of economic growth.

Investors hope continued rate cuts from the Fed, which began easing rates at its September meeting, will rekindle the economy and soothe the stock market.

The central bank's 0.75 percentage-point cut Tuesday to its target for the federal funds rate "was sorely needed, and time will tell whether this will be enough to calm investor nerves," writes BlackRock global chief investment officer Bob Doll in a client note. He believes the domestic sell-off is overdone.

In past Fed easing cycles since 1945, the S&P 500 climbed an average 12.3 percent in the six months after the Fed's first cut, more than the market's average annual 9 percent gain, writes S&P chief investment strategist Sam Stovall.

However, it has declined four out of eleven times in the six months after a rate cut.

Many believe the Fed will keep easing. "As of now, it will depend on how financial markets take this news," writes Lehman Brothers analyst Drew Matus.

He thinks another cut could come at the Fed's Jan. 29-30 meeting and expects the federal funds rate to fall to 2.5 percent by June.