Stocks closed sharply higher after a late-session rally as investors piled into sectors seen as resistant to economic contraction, such as health care and staples, amid talk of recession.
Goldman Sachs was the latest to sound the recession alarm. The investment bank said U.S. real gross domestic product would contract by 1 percent on an annualized basis in the second and third quarters.
Defensive issues on the rise included drug maker Merck No. 1 drink maker Coca-Cola.
Earlier, the markets struggled to gain ground as investors took only a bit of comfort in a speech from a key Fed policy-maker that indicated possible additional interest rate cuts.
The trend is characteristic of a market in a correction, which this one entered Tuesday as indexes were more than 10 percent off their highs.
"There's a lot of things going against this market," said Michael Cohn, chief investment strategist of Atlantis Asset Management. "It's a very cloudy economic picture, it's a very cloudy political picture. Technically, the market is really not in good shape."
Investors have been looking for clues as to how the Federal Reserve will proceed with monetary policy. St. Louis Fed President William Poole said inflation would not be aggravated by further cuts, but also said he didn't see clear-cut signs of a recession.
Markets greeted the comments with only mild enthusiasm, sending the Dow up slightly but keeping the S&P and the Nasdaq near even.
"If the evidence suggests that substantial policy easing is appropriate, I don't think we're going to face a risk of adverse inflation expectation consequences," Poole said.
But Goldman Sachs contended a recession was imminent, leading to tepid trading on Wall Street.
Tobacco stocks were doing well, with Altria and Reynolds American, which was upgraded by UBS, both at or near all-time highs.
Chemical maker DuPont raised its 2007 financial outlook to reflect stronger-than-expected results in the fourth quarter and also raised expectations for 2008. The company was the biggest gainer of Dow components.
In other news, major energy producer BP found itself forced to deny rumors that it was lowering its fourth-quarter earnings forecast, much like Countrywide Financial, which Tuesday had to deny rumors of an impending bankruptcy filing. BP's shares also slumped, falling their most in five years on a rough day for the industry.