Stocks staged a broad recovery on Tuesday after Monday’s big sell-off. The Dow Jones industrials gained 485.21 points, halving the 777-point decline on Monday.
But the health of the economy and the global financial system was by no means assured. Strains worsened overnight in the credit markets, the plumbing of the economy that many businesses rely on to finance routine expenses like utilities and payroll. Banks sharply increased their lending rates on short-term loans, sending Libor, a globally watched benchmark rate, to its highest level ever.
“The money markets have completely broken down, with no trading taking place at all,” said Christoph Rieger, a fixed-income strategist at Dresdner Kleinwort in Frankfurt. “There is no market any more. Central banks are the only providers of cash to the market; no one else is lending.”
The problems in the credit markets could threaten the broader financial system. But for the moment, investors were placated somewhat by the rise in stocks, with the Standard & Poor’s 500-stock index, a broad measure of major companies, up 5.2 percent.
It is not unusual for stocks to show signs of recovery in the hours after a significant rout. In the last several decades, the S.& P. has dropped by more than 6 percent on only a handful of occasions. (It fell by almost 9 percent on Monday.) On average, the index has rallied by 3.5 percent the next day, according to data from Citigroup. …