Stocks erase early losses on hopes for Fed action

NEW YORK (AP) ? Stocks wiped out steep morning losses Tuesday after Federal Reserve Chairman Ben Bernanke said the central bank is prepared to take more steps to stimulate the economy.

Indexes opened sharply lower as traders worried that Greece could be edging closer to default. Shortly after midday the Standard & Poor’s 500 index was up 2 points.

The S&P 500 was down 24 points a half-hour after trading started, putting it 20 percent below its recent peak reached April 29. A decline of that size is usually considered the start of a bear market.

At 12:15 p.m., the Dow Jones was down 60 points, or 0.6 percent, to 10,595. It had been down as many as 250 points at 10 a.m., just as Bernanke started speaking before Congress.

The S&P 500 was up 2 points, or 0.2 percent, at 1,101. If it closes below 1,090, it would mark a 20 percent decline from the recent peak of 1,363.

Smaller companies rose much more than the overall market. The Nasdaq composite rose 34, or 1.5 percent, to 2,369. The Russell 2000 index of small companies jumped 14, or 2.4 percent, to 623.

Markets have been reacting nervously to worries about Europe’s debt crisis. European finance ministers suggested at a meeting Tuesday that holders of Greek debt may be required to take larger losses than originally thought, which would hurt banks that hold Greek bonds. Greece has said it wouldn’t be able to make budget cuts it had agreed to as part of a deal to receive emergency loans.

“Europe is the center point of all of this,” said Paul Zemsky, head of asset allocation at ING Investment Management. “The big fear in the market is that company earnings are not sustainable and that Europe’s problems are going to spread into the U.S. banking system.”

In testimony before Congress, Bernanke said the economy is weaker than the central bank expected and that poor job growth continues to undercut consumer confidence. He warned Congress that deep spending cuts may impede a recovery.

Bernanke also said the central bank is prepared to take further steps to stimulate the economy. That could mean another round of asset purchases, a tactic known as quantitative easing, noted David Ader, chief government bond strategist at CRT Capital Group.

The yield on the 10-year Treasury note rose to 1.83 percent from 1.78 percent late Monday. It briefly went as low as 1.72 percent around 10 a.m., near its record low of 1.71 percent reached Sept. 22. Bond yields fall when their prices rise.

The S&P index has fallen every month since April on mounting concerns about the strength of the U.S. economy and the possibility that the debt crisis in Europe could get worse. The stock market is thought to be forward-looking, reflecting investors’ views of the economy in 6 to 9 months.

The S&P 500 has anticipated all 11 recessions in the U.S. economy since 1948, according to Sam Stovall, chief equity strategist at Standard & Poor’s. Stocks usually begin their descent about 7 months before a recession starts and drop an average of 30 percent.

In corporate news, Bank of America Corp. lost 2.9 percent to $5.37 as investors continued to be troubled by its exposure to soured mortgages securities and a several-day outage of its website. The company’s stock lost 9 percent Monday to $5.53, a level not seen since 2009.

Apple Inc. is widely expected to announce the newest version of its iPhone Tuesday. Tim Cook, who took over the company’s CEO role from co-founder Steve Jobs in August, is expected to unveil the new smartphone at Apple’s Cupertino headquarters. The company gained 1.1 percent in midday trading.

European indexes also declined sharply. Benchmark indexes in Germany, France, and Spain each lost more than 2 percent.