- Associated Press - Tuesday, September 20, 2011

NEW YORK — Investor optimism faded in a hurry Tuesday after two days of conferences ended with no resolution to Greece’s debt crisis.

Stocks erased nearly all of their gains in the last hour of trading after rallying for much of the day on hopes the Fed would stimulate the economy.

At the closing bell, the Dow Jones industrial average was left with a gain of 7.65 points, or 0.1 percent, at 11,408.66. It had been up as much as 149.21 points earlier in the day.

The Standard & Poor’s 500 index fell 2, or 0.2 percent, to 1,202.09. The Nasdaq composite fell 22.59, or 0.9 percent, to 2,590.24.


Many analysts believe the Fed will announce a new stimulus plan at the end of a two-day policy meeting Wednesday. But another two-day meeting, a teleconference between Greek officials and international lenders, spurred sellers late in the day.

After the teleconference, the European Commission said debt inspectors would continue to review Greece’s progress on its budget goals early next week. That suggested to investors that a resolution to Greece’s debt crisis wouldn’t come in the next few days.

Greek Finance Minister Evangelos Venizelos attempted to convince the European Commission, International Monetary Fund and European Central Bank, known collectively as the Troika, that Greece can make deep budget cuts. Greece must meet the Troika’s strict budget targets in order to qualify for a second installment of the rescue package it received in 2010 to keep it from defaulting on its debt.

Greece is only one of several European countries that investors fear may be at risk of failing to pay their debts. On Monday night, the ratings agency Standard & Poor’s cut Italy’s credit rating by one notch, citing the country’s growing debt and weak growth outlook. Italy has the second-biggest debt burden among countries that use the euro, after Greece.

If Greece or Italy were to default, European banks that have lent money to the countries could lose billions of dollars. That could hurt the European banking system and have repercussions for U.S. banks, which have lent billions to their European counterparts. Investors are concerned that a default in Europe could cause a lending crisis similar to what happened after the collapse of Lehman Brothers in 2008.

Investors have shifted between optimism and pessimism that the region’s debt problems will be resolved. Stock prices have swung sharply for months in response to investors’ changing mood. Moves of more than 100 points in the Dow have become commonplace.

Right now, hopes are not high that Greece will avoid a default, said David Smith, chief investment officer at Rockland Trust Investment Management Group, a firm based in Rockland, Mass., that manages about $1.7 billion in assets. “I’m sitting here, like a lot of investors, thinking we don’t have anything like a concrete solution,” he said.

A bleak forecast for U.S. economic growth added to fears the U.S. could be headed for a second recession, but sparked hopes that the Fed would be persuaded to enact stimulus measures.

The International Monetary Fund lowered its forecast for the country’s growth this year. Some saw it as another reason for the Fed to act. The IMF said it expects the U.S. economy to grow only 1.5 percent this year and 1.8 percent in 2012. In June, it had forecast 2.5 percent growth in 2011 and 2.7 percent in 2012.

The IMF also lowered its outlook for the 17 countries that use the euro because it fears Greece will default on its debt.

In a sign that the market’s afternoon rally was a cautious one, stocks were led higher by industries that tend to do well regardless of the economy, like utilities and health care. Investors are reluctant to take much risk, said Quincy Krosby, market strategist for Prudential Financial.

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