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US stocks close sharply higher a day ahead of Fed gathering

U.S. stocks surged on Monday, with the Dow and the S&P 500 bouncing back from two consecutive weekly declines, as Wall Street tried to measure what's ahead for monetary stimulus one day ahead of a two-day Federal Reserve meeting.

"Last week's sell off was a bit overdone, with the market reacting negatively to more positive data," Randy Frederick, managing director of active trading and derivatives at the Schwab Center for Financial Research, said of the 1.7 percent weekly drop on the S&P 500, its biggest weekly hit since Aug. 30.

Shares of Herbalife were briefly halted pending news, with the company announcing the completion of its re-audit for three years. Its shares resumed in rally mode.

Exxon Mobil rose after Goldman Sachs Group upgraded its rating on the oil producer's shares to buy from neutral. American International Group gained after the insurer said it would sell its plane-leasing business to AerCap Holdings. Sprint advanced after the Wall Street Journal reported the wireless carrier was considering a bid for T-Mobile US. Cirrus Logic fell after Oppenheimer downgraded shares of the audio-chip manufacturer to underperform from market perform.

"The economy is on a roll, and tapering is not a concern for the market anymore. I've been calling for the Fed to take action this month, and I think they will, but this month or January is irrelevant at this point," said Peter Cardillo, chief market economist at Rockwell Global Capital.

The Federal Open Market Committee's monetary decision is expected on Wednesday afternoon.

"I don't expect them to do it by much, they don't want to shock the markets," Cardillo added of the rate at which the Fed might begin to cut its $85 billion in monthly bond purchases.

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The Dow Jones Industrial Average climbed 129.21 points, or 0.8 percent, to 15,884.57, with International Business Machines leading gains that included all but four of its 30 components.

After falling 1.7% last week, its largest drop since the end of August, the S&P 500 rose 11.22 points, or 0.6 percent, to 1,786.54, with industrials leading a broad rally that extended to all but one of its 10 major industry groups.

The Nasdaq added 28.54 points, or 0.7 percent, to 4,029.52.

For every stock falling, two rose on the New York Stock Exchange, where 681 million shares traded. Composite volume approached 3.2 billion.

The dollar gained against the currencies of major U.S. trading partners and the yield on the 10-year Treasury note used in figuring mortgage rates and other consumer loans rose 1 basis point to 2.88 percent.

Crude-oil futures rose 88 cents, or 0.9 percent, to $97.48 a barrel on the New York Mercantile Exchange; gold futures added $9.80, or 0.8 percent, to $1,244.40 an ounce.

Economic reports on Monday had a gauge of manufacturing activity in the New York region climbing less-than-expected in December, and U.S. productivity climbing 3 percent in the third-quarter.

Another report had U.S. industrial production rising 1.1 percent in November, compared to consensus estimates of a 0.4 percent hike.

Before Wall Street's open, stock futures furthered their gains after a survey from Markit Economics had euro-area manufacturing rising to a 31-month high in December.

The S&P 500 has risen 25 percent this year as the Fed has continued its stimulus and economic reports have cast a better-than-expected light on the U.S. economy.

While there's a strong logical case for phasing out quantitative easing, including economic variables and the "increasingly large hangover that will be its inevitable aftermath, this Federal Reserve has proven itself to be among the most dovish in history. Because of this, many investors continue to believe that they will avoid the tough decision for at least another meeting," wrote David Kelly, chief global strategist at J.P. Morgan Funds, who believes the central bank should begin to cuts its bond purchases now to maintain its credibility.

"While logically, the decision to taper on Wednesday shouldn't be a close call, in practice it is. If the Fed does decide to reduce bond purchases, we might well see long-term rates rise, the dollar appreciate and stocks fall, although the latter reaction could be short-lived," Kelly added.

—By CNBC's Kate Gibson

Coming Up This Week:

Tuesday: Consumer Price Index for November; Current Account for third quarter; NAHB Index. Earnings from FactSet, Sanderson Farms and Verifone.

Wednesday: Housing starts for November; building permits; conclusion of Federal Open Market Committee meeting. Earnings from FedEx, General Mills, Lennar, Oracle, Paychex, Herman Miller and Steelcase.

Thursday: Initial jobless claims; existing home sales for November; Philadelphia Fed Survey; Leading indicators for November. Earnings from Nike, Red Hat, Darden, Accenture, Rite-Aid, Worthington Industries and Tibco Software.

Friday: Third-quarter GDP. Earnings from Blackberry, Carmax and Walgreen.

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