Wall Street barreled higher today in a relief rally over the government's plan to bail out Citigroup — a move it hopes will help quiet some of the uncertainty hounding the financial sector and the overall economy.

Share story

NEW YORK — Wall Street barreled higher today in a relief rally over the government’s plan to bail out Citigroup — a move it hopes will help quiet some of the uncertainty hounding the financial sector and the overall economy.

The Dow Jones industrials gained 396.97, or 4.9 percent, to close at 8,443.39. Near the close the Dow had soared more than 500 points.

Broader stock indicators also jumped. The Standard & Poor’s 500 index advanced 51.78, or 6.5 percent, to 851.81, and the Nasdaq composite index rose 87.67, or 6.3 percent, to 1,472.02.

The advance comes even after the markets anticipated last week that some sort of rescue for Citigroup could occur. But investors nonetheless appeared emboldened by the U.S. government’s decision late Sunday to invest $20 billion in Citigroup and guarantee $306 billion in risky assets.

Wall Street’s enthusiasm surged not only because the bailout answered questions about Citigroup but also because many observers saw the move as offering a template for how the government might carry out other bank stabilizations.

The market rallied following announcement of the plan by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp. (FDIC) to stabilize Citigroup. It’s only the latest effort this year to support a banking system troubled by bad debt and flagging confidence. Besides implementing its $700 billion bailout plan for the overall financial industry, the government has bailed out insurance giant American International Group (AIG) and taken over lenders Fannie Mae and Freddie Mac.

Jim Baird, chief investment strategist with Plante Moran Financial Advisors, said Wall Street was calmed by the government’s decision to help prop up Citigroup, but he predicted that the initial enthusiasm could give way to further questions about the effectiveness of the government’s array of efforts to sew up problems in the financial sector.

“I think, at a minimum, what you’re seeing today is some relief that, first of all, they’re stepping in to do something,” he said. “There’s still more questions than answers surrounding whether what’s been done is going to be enough.”

The rise in stocks follows a rally Friday that saw the Dow industrials jump 494 points, or 6.5 percent. The other major indexes also rose sharply. Still, stocks ended the week with a loss after heavy selling Wednesday and Thursday.

Lancz said Friday’s rally and today’s follow-up reflect a renewed sense that Washington is taking steps to help repair the markets and that the scope of selling for much of last week had left the market overdue for a rally.

“The market is looking for some stewardship. It’s at least adding to the bleak confidence that investors have,” he said, referring to the Citigroup plan as well as the overtures of the still-forming Obama administration.

Bond prices were mixed today as investors examined the government’s bailout plan for Citigroup. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.36 percent from 3.20 percent late Friday.

The Treasury bill market showed continuing high demand, a sign of investors’ caution. The yield on the three-month T-bill, considered one of the safest investments, fell to 0.02 percent from 0.04 percent late Friday.

Oil rose $4.57, to close at $54.50 a barrel on the New York Mercantile Exchange. Prices hit $55.30 at one point.

Despite today’s gain, Baird said the uncertainty over whether the government’s cocktail of direct investments in financial houses and support of debt obligations will prove effective has led to the stock market volatility. The concerns about banks and the broader economy are likely to continue, he said.

“Just the sheer breadth of potential outcomes is very, very wide which I think makes it difficult for investors to determine how do you play it from here.”

Stocks briefly pared their gains as President-elect Obama formally named his economic team but didn’t offer specifics of an economic stimulus package nor state that he would push back a plan to raise taxes on the richest Americans. He reiterated his goal of creating 2.5 million jobs during the next two years.

Alan Lancz, director at investment research group LanczGlobal, said that while the market might have wanted a firmer commitment against raising taxes, it was too soon for Obama to outline specifics. Lancz expects the new administration wouldn’t rush to implement the hikes if the economy appeared too weak.

“There’s so many balls in the air right now he’d be foolish to make specific comments,” Lancz said, noting that the economic picture could change greatly by Inauguration Day, which is Jan. 20.

Wall Street shrugged off a larger-than-expected drop in sales of existing homes last month as investors instead focused on the government’s plans for the financial sector. And while the housing numbers fell short of expectations, Wall Street expected sales would fall sharply after last month’s upheaval in the financial markets.

The National Association of Realtors says sales of existing homes fell 3.1 percent to a seasonally adjusted annual rate of 4.98 million in October. That’s down from 5.14 million in September.

The financial sector led today’s advance, fueled by a sense that the government might be developing a more nuanced yet ready-to-apply medicine for financial firms. Just after the close, Citi share were up $2.07, or 54.9 percent, to $5.84 following the government’s decision to inject capital into the company.

Overseas, Britain’s FTSE 100 jumped 9.8 percent, Germany’s DAX index surged 10.3 percent, and France’s CAC-40 rose 10.1 percent. Hong Kong’s Hang Seng index fell 1.6 percent; markets in Japan were closed for a holiday.