NEW YORK - Wall Street finished higher in an uneasy session Monday as retail and homebuilders stocks rose on expectations for more interest rate cuts, but banks and insurers fell on worries about further mortgage debt troubles.
The Federal Reserve has been in rate-cutting mode this year and it is expected to lower the federal funds rate once more either this month or at its next regularly scheduled meeting March 18. And the cheaper cost of money is beginning to register in the stock market.
"A number of sectors like retail and housing stocks have done better since the Fed acted, and they are leading the market again today," said Steve Goldman, chief market strategist at Weeden & Co. "These stocks are called early bellwethers and they tend to lead a recovery."
But investors continue to grapple with bad news in the credit markets. The stock market fell in early trading and remained volatile even after recovering, with Wall Street clearly concerned by news that American International Group Inc. might have more mortgage debt to write off.
AIG, one of the 30 companies that make up the Dow Jones industrial average, said in a regulatory filing it would need to alter the way it values its credit default swaps involving collateralized debt obligations. Credit default swaps are insurance policies against defaults, and CDOs are funds that contain slices of bonds, some of which are backed by mortgages.
The insurer said auditors found it "had a material weakness in its internal control over financial reporting and oversight" regarding how it valued certain credit default swaps. The filing raised concerns that there will be further losses at AIG, and that other financial companies might reveal similar problems. AIG dropped $5.94, or 11.7 percent, to $44.74.
The Dow rose 57.88, or 0.48 percent, to 12,240.01. Dow Jones & Co. said it was replacing two of the blue chip index's 30 components — Altria Group Inc. and Honeywell International Inc. — with Bank of America Corp. and Chevron Corp., effective Feb. 19.
Broader stock indicators ended higher, too. The Standard & Poor's 500 index rose 7.84, or 0.59 percent, to 1,339.13, and the Nasdaq composite index rose 15.21, or 0.66 percent, to 2,320.06.
In addition to rate cut expectations, Hasbro Inc. gave the market a lift, saying its fourth-quarter income soared 24 percent, thanks to a 16 percent increase in sales. Its shares rose 54 cents, or 2 percent, to $26.41.
Meanwhile, Yahoo Inc.'s board rejected a $44.6 billion takeover offer from Microsoft Corp. Yahoo said its board concluded that Microsoft's unsolicited offer "substantially undervalues" the Internet search company. Microsoft, a Dow component, fell 35 cents to 28.21, but Yahoo rose 67 cents, or 2.3 percent, to $29.87.
In other dealmaking news, The Wall Street Journal reported that Motorola Inc. and Nortel Networks are in talks to merge their wireless infrastructure businesses. If a deal happens, it would create a firm with $10 billion in annual sales. Motorola rose 31 cents, or 2.8 percent, to $11.57, and Nortel dipped 18 cents to $10.89.
Bond prices rose Monday. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.61 percent from 3.65 percent late Friday.
The dollar was mixed against other major currencies, while gold prices rose.
The Russell 2000 index rose 0.85, or 0.12 percent, to 699.75.
Advancing issues outnumbered decliners by about 8 to 7 on the New York Stock Exchange, where volume 1.39 billion shares.
Light, sweet crude oil rose $1.82 to settle at $93.59 per barrel on the New York Mercantile Exchange.
Last week was the worst week, percentage-wise, for the Dow since March 2003. The blue-chip index fell 4.4 percent, and meanwhile, the S&P's 500 index declined 4.60 percent and the Nasdaq dropped 4.50 percent. The Dow is about 15 percent below its Oct. 9 record close of 14,164.53, and about 4 percent above the 15-month lows it hit in January.
Though Wall Street managed a gain Monday despite AIG's report suggesting possible credit-related losses, many analysts believe there is still bad news yet to come in the credit markets that could have more deleterious effects on the stock market and the broader economy.
"The absolute seizure of the credit markets in the corporate arena is going to put enormous pressure on American companies," said George Feiger, CEO of Contango Capital Advisors, the wealth management arm of Zions Bancorporation. "And this is really bad news for the economy."
Overseas, Japan's stock market was closed for a holiday, while in Hong Kong, the Hang Seng index finished down 3.64 percent. Britain's FTSE 100 closed down 1.32 percent, Germany's DAX index fell 0.35 percent, and France's CAC-40 lost 0.57 percent.
The changes are the first in the index's basket weighting of 30 leading companies in almost four years and will give Bank of America and Chevron more corporate visibility. 
Finance leaders from the Group of Seven major economies said at the weekend that the crumbling U.S. housing market had hurt the world economy and that conditions may worsen as debt-laden banks clamp down on credit. 
This week's data on the U.S. consumer, particularly the Commerce Department's Wednesday report on January retail sales, are going to be monitored closely by investors for clues to how sunken home prices, high energy costs and job cuts are affecting spending. 
The announcement by the world's second biggest toy company came as it reported a hefty 24 percent rise in fourth-quarter profit and said sales rose 16 percent, driven by its core brands including Transformers, Littlest Pet Shop and Star Wars. 
The second-largest U.S. toy maker also said Chief Executive Al Verrecchia would step down as CEO and become chairman. Brian Goldner, its chief operating officer, will become CEO as of May 22. 
In a brief introduction to his annual economic report, Bush said the $168 billion economic rescue package passed by Congress last week will keep "our economy growing and our people working."