Stocks to struggle despite rescue plan

By Steven C. Johnson

NEW YORK (Reuters) - Wall Street's mood will likely remain dark this week as fallout from the credit crisis continues to corrode the U.S. economy and questions linger about the likely effectiveness of the newly passed bailout plan in shoring up the financial system.

On Friday, Wall Street ended its worst week in seven years with another tumble on fears that the $700 billion financial rescue package may not unblock credit markets and stave off a U.S. recession.

The plan will take bad mortgage debt off banks' hands so they can step up lending to households and businesses.

Aside from the bailout, the start of the corporate earnings season will vie for investor attention. Alcoa Inc (AA.N) will kick off the third-quarter company reports on Tuesday.

But corporate results aside, grim economic data -- topped by a government report showing the economy slashed 159,000 jobs in September in the biggest monthly decline in 5 1/2 years -- confirms that the serious trouble on Wall Street has spread to Main Street.

What's more, lending should remain extremely tight. About the best investors can hope for, analysts said, is a very slow thaw in frozen credit markets, and even that is not a sure bet.

The cost for banks to borrow dollars over a three-month horizon shot up for a fifth straight day on Friday, signaling a widespread lack of confidence.

"The reality is that it's going to take months for credit markets to thaw out, and the stock market will remain very nervous because of the rapid deterioration in the economy," said Fred Dickson, director of retail research at D.A. Davidson & Co in Lake Oswego, Oregon.

And while they say a rescue was necessary, investors also contend it was far from sufficient to grease the gears of the banking system. For one thing, even though U.S. President George W. Bush signed the bill into law on Friday, the plan will take time to kick into action.

"We're still in the thick of this. It's like turning a cruise ship around -- you can't do it on a dime," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.

There have been some hopeful signs of late. Markets reacted favorably to news on Friday that Wells Fargo & Co (WFC.N), one of the strongest U.S. banks left, had agreed to buy Wachovia WB.N, which holds a large portfolio of troubled mortgages -- without government help.

Peter Boockvar, equity strategist at Miller Tabak & Co, said banking sector consolidation should help surviving strong banks while also boost confidence and lending.

Hope that financial services stocks may be nearing a bottom also blossomed as Warren Buffett put $3 billion into economic bellwether General Electric (GE.N) last week, a move that came shortly after his $5 billion investment in Goldman Sachs (GS.N).

RECESSION FEARS, RATE CUT HOPES

Still, all three major indexes -- the Dow, Nasdaq and benchmark S&P 500 -- remain down some 20 percent on the year, and the economic picture continues to look grim.