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Stocks Rally on Positive Economic News

Stocks posted their biggest gains in a week even though a series of strong economic reports cast doubts about whether the Federal Reserve will cut interest rates next week.

Tech, industrials and financials all rose, with leading Dow components Microsoft , ExxonMobil and Citibank posting solid gains.

A series of strong economic reportsshowing unexpectedly big gains in employment, productivity and factory ordersgenerated some uncertainty among traders initially over worries that the Fed will be less aggressive than anticipated in monetary policy.

"Today the market went up because people think the Fed won't need to ease as much," said Jim Paulsen, chief investment officer at Wells Capital Management in Minneapolis. "The first step in getting better is for the patient to get out of the bed and walk on its own without the Fed I.V. drip."

Beleaguered Dow component American International Group moved higher after the company said its subprime exposure was "manageable," while Comcast moved the other way after it lowered guidance.

MBIA, which had been moving well higher earlier in the day, slumped as much as 14 percent in afternoon trading after Moody's downgraded the guarantor. The news caused indexes to trim gains, with indexes well off the day's highs but still up comfortably by 2:30 p.m.

Another big decliner was Genentech , which tumbled after regulators voted against the pharmaceutical's Avastin drug proposed for treatment of breast cancer, a big disappointment for a company expecting Food and Drug Administration approval. Trading was halted and the stock could be in for sharper losses once it is reopened.

In retail, jeans maker Guess? moved sharply higher, as it gained more than 8 percent on strong after-the-bell earnings Tuesday. Collective Brands , owner of Payless shoe stores, also surged on better-than-expected earnings.

On the other side, Chico's was the sector's biggest loser after it reported lower earnings, also after the bell yesterday.

Chip stocks showed gains as well in a big day for tech, with shares up at Intel, Texas Instruments and Qualcomm.

Market breadth was positive, with gainers beating losers 4 to 1.

Oil Prices Rise

Oil slipped below $88 after surrendering big gains earlier in the day it achieved on news that OPEC left production unchanged.

The Organization of Petroleum Exporting Countries, which controls more than a third of the world oil market, agreed at a meeting in Abu Dhabi to keep output unchanged, saying the market was already well-supplied.

"Our position is that demand and supply are balanced and there is no need to increase oil to the market," said Iranian Oil Minister Gholamhossein Nozari.

Treasurys erased losses following the MBIA downgrade after a day in which bonds struggled due to lowered expectations for a rate cut. The dollarrose to a one-month high against a basket of currencies on the strong economic reports.

-- Reuters contributed to this report.