Wall Street closes lower as economic worries take over

NEW YORK — Wall Street erased an early rally today, sinking as enthusiasm fizzled about a $586 billion Chinese stimulus package and gave way to anxiety about how U.S. companies will survive a severe pullback in spending.

At the close, the Dow Jones industrial average was down 73.27, or 0.8 percent, at 8,870.54.

Broader market indexes fell more sharply. The S&P 500 index was off 11.78, or 1.3 percent, at 919.21, and the Nasdaq composite index was down 30.66, or 1.9 percent, at 1,616.74.

Investors were initially cheered by China's plans to boost its economy through a mix of spending, subsidies, looser credit policies and tax cuts. The package could benefit multinational companies with business in China such as General Electric and Caterpillar.

Wall Street's optimism quickly waned, however, as it has tended to do since the mid-September downfall of Lehman Brothers and government takeover of the troubled insurance giant American International Group (AIG). Market participants realized that while China's stimulus is a positive sign that governments around the world are working to fix the global economy, the stimulus itself will likely have only a limited effect in the United States.

And there was little news today to placate investors worried about the health of corporate America. AIG got more money from the U.S. government today, but the nation's struggling automakers have yet to hear whether they, too, will get federal aid. And in a stark reminder that even large, established companies are suffering, electronics retailer Circuit City filed for bankruptcy protection today.

Stocks are cheap after the recent sell-off, but few are confident enough to make big bets.

"They'd like to be optimistic, but individual investors are still very worried," said Hugh Johnson, chairman and chief investment officer of Johnson Illington Advisors. Uncertainty about the economic outlook is "likely to hold any recovery somewhat in check. We're arguably undervalued, so we can work our way higher. But it's not going to be with a lot of gusto."

The U.S. government said it would invest $40 billion into AIG, which also reported a nearly $25 billion third-quarter loss today. AIG, which got its first bailout in September, has so far received a total of $150 billion in government aid. The government's investment today helped the insurer's stock rise 26 cents, or 12 percent, to $2.37, but raised worries that problems in the financial sector might be worse than anticipated. Most bank shares fell.

On Friday, the major indexes rallied, but ended about 4 percent lower on the week after large midweek losses. Trading this week is expected to remain volatile; analysts have predicted the market will remain turbulent as it tries to recover from October's devastating losses.

"We had a nice movement on Friday. But the fact is, we haven't been holding rallies very well," said Scott Fullman, director of derivatives investment strategy for WJB Capital Group. He said investors appeared be cashing out Friday's gains ahead of what's expected to be a dismal retail sales report this week and the bond market's Veterans Day holiday Tuesday.

With stocks trading erratically, investors moved to the relative safety of government bonds.

The Treasury auctioned three-year Treasury notes for the first time since May 2007, and the auction saw strong buying. Meanwhile, the three-month Treasury bill's yield fell to 0.21 percent from 0.28 percent late Friday, and the yield on the benchmark 10-year Treasury note fell to 3.75 percent from 3.79 percent late Friday.

Lower yields indicate stronger demand.

Circuit City filed for bankruptcy protection today about a week after it said it would close 20 percent of its stores. The electronics retailer, based in Richmond, Va., has been struggling as nervous consumers spend less and credit has become tighter. Shares sank 14 cents, or 56 percent, to 11 cents.

Oil rose $1.37 to settle at $62.41 a barrel on the New York Mercantile Exchange today, but swung as low as $59.10 at one point.

The dollar was mixed against other major currencies, while gold prices rose.

Overseas, Japan's Nikkei stock average closed up 5.8 percent, and Hong Kong's Hang Seng index added 3.5 percent. In Europe, the Britain's FTSE 100 rose 0.9 percent, Germany's DAX added 1.8 percent, and France's CAC-40 rose 1.1 percent.