Stocks end mixed as Federal Reserve calls rise in economic activity 'modest'

NEW YORK -- Early gains in stocks unraveled Wednesday after the Federal Reserve signaled that the economic recovery will be slow.

Stocks ended mixed after the Fed's announcement that economic activity has improved in nine of its 12 districts but that the gains are "modest."

The report dampened enthusiasm that followed an upbeat report on service industries and more takeover news. The Dow Jones industrial average fell 9 points. For a second day, the Dow erased its losses for 2010 before surrendering the gains by the close.

Stocks had been up for three straight days, so some slowdown wasn't surprising. Major stock indexes stand at their highest levels since mid-January, when the Standard & Poor's 500 index began a 9 percent drop on concerns that the market was getting too far ahead of the still-struggling economy.

The market got an early boost Wednesday from a report that service industries grew at the fastest rate in two years last month. Growth in service industries is seen as crucial for a rebound. The Institute for Supply Management's services index for February rose to 53 from 50.5 in January. Economists had forecast that the index would hit 51.

More corporate dealmaking also helped stocks, as occurred earlier in the week. Acquisitions signal that businesses are confident in the direction of the economy. In the latest deal, private equity firm Elliott Associates offered to buy the 91.5 percent of software maker Novell Inc. that it doesn't already own.

Separately, a report on the labor market came in as expected. Payroll company ADP said employers cut 20,000 jobs last month.

The ADP report is seen an early indicator of the government's closely watched monthly employment report, though there are often wide variations. The Labor Department is expected to report on Friday that the unemployment rate edged up to 9.8 percent last month and that employers cut 50,000 jobs. The struggling labor market is still one of the biggest concerns for investors.

But the Fed's afternoon report raised concerns that the recovery will be slow because of weak demand for loans and a mostly soft job market.

Tom Samuels, manager of the Palantir Fund in Houston, said he isn't seeing enough of an improvement in economic numbers to justify confidence in the recovery.

"We're coasting along from one day to the next and from one week to the next but we're really not getting any sense that things are being structurally fixed," Samuels said.

His fund bets certain stocks will rise while others will fall.

The Dow fell 9.22, or 0.1 percent, to 10,396.76. It had risen nearly 64 points during trading.

The broader S&P 500 index rose 0.48, or less than 0.1 percent, to 1,118.79, its highest close since Jan. 20. The Nasdaq composite index slipped 0.11, or less than 0.1 percent, to 2,280.68.

Bond prices fell, pushing yields higher. The yield on the benchmark 10-year Treasury note rose to 3.63 percent from 3.61 percent late Tuesday.

The dollar was mixed against other major currencies. Gold rose.

Crude oil rose $1.19 to $80.87 per barrel on the New York Mercantile Exchange.

Recent dealmaking has raised hopes that businesses will boost spending. Insurer American International Group agreed earlier in the week to sell its important Asian life insurance business to Britain's Prudential for $35.5 billion. On Tuesday, Dow Chemical Co. sold its Styron plastics business to private equity firm Bain Capital for $1.63 billion.

Nick Kalivas, vice president of financial research at MF Global in Chicago, said the merger news has reassured investors that stocks aren't overpriced because companies are still willing to pursue deals.

"It's causing people to get excited about owning stocks and I think it shows that there might be some value here," Kalivas said.

Meanwhile, austerity measures announced by Greece on Wednesday allayed some concerns about the global economy. Investors have been trying to determine whether problems there will spill over to other economies.

Among stocks, Novell jumped $1.33, or 28 percent, to $6.08.

Health care stocks fell after a drug being developed by Pfizer Inc. and Medivation Inc. for Alzheimer's disease failed in a late-stage trial. Pfizer fell 28 cents, or 1.6 percent, to $17.32. It was the biggest loser among the 30 stocks that make up the Dow.

Medivation plunged $27.15, or 67.5 percent, to $13.10 a day after setting a 12-month high.

The drop in health stocks came after President Barack Obama called on Congress to pass his latest health care package, which incorporates some Republican proposals.

Advancing stocks narrowly outpaced those that fell on the New York Stock Exchange, where consolidated volume came to 4 billion shares compared with 4.3 billion Tuesday.

The Russell 2000 index of smaller companies rose 0.95, or 0.2 percent, to 649.26.

Britain's FTSE 100 rose 0.9 percent, Germany's DAX gained 0.7 percent, and France's CAC-40 rose 0.8 percent. Japan's Nikkei stock average rose 0.3 percent.