Stocks ended a topsy-turvy session higher as optimism over the Obama stimulus plan prevailed over a profit warning from Bank of America and some dismal economic news.
The Dow Jones Industrial Average ended up 62.21, or 0.7 percent, at 9015.10. The S&P 500 gained 0.8 percent, while the Nasdaq jumped 1.5 percent.
President-elect Barack Obama said Tuesday, after meeting with his economic team, that he expects to inherit a budget deficit approaching $1 trillion. Obama is planning to act swiftly to get a stimulus package that would include tax cuts approved.
Despite the grim economic prospect, there was a tone of optimism in the market.
"In the very near term, there's just a lot of optimism," Jason Roney of Sharmac Capital told CNBC. "There's a perception in the very near term that the worse the data is, the better the stimulus will be," he said.
In today's economic news, pending-home sales fell 4 percent in November to the lowest level since the National Association of Realtors started keeping track in 2001, and factory orders fell for a fourth straight month. Meanwhile, the ISM services index rose unexpectedly in Decemberto 40.6 from 37.3 in November, though the index remains under 50, which indicates contraction.
The Federal Reserve worried that rate cuts weren't enough for the current downturn when it met in mid-December, according to minutes released today from that meeting.
A flurry of news came out just ahead of the closing bell.
Bank of America CEO Kenneth Lewis told employees in an internal memo that the firm will likely miss its 2008 target, according to a report in the Wall Street Journal. As a result, he recommended no bonuses for himself and other executives.
Meanwhile, Merrill Lynch's brokerage head, Robert J. McCann, resigned just as the company's acquisition by Bank of Americawas completed, sparking concern that it could lead to a mass exodus of brokers.
Bank of America shares finished up 2.2 percent.
In other late-breaking action, Alcoa announced plans to cut 13,500 jobs, or 13 percent of its work force, as part of its survival strategy for the economic slowdown. Shares ended up 2.2 percent but fell in after-hours trading.
This follows Monday's session, when stocks snapped a three-day winning streak, sending Santa and his year-end rally packing.
Helping to buoy the market, technology stocks advanced amid the thinking that the huge cashpiles some big-cap techs are sitting on will help them weather the downturn better than other companies.
Dell , Hewlett-Packard and Research In Motion rose more than 5 percent.
Apple shares initially rose after an upgrade from Oppenheimer, but the stock quickly retreated amid disappointment that there were no new product announcements at MacWorld. One thing that did emerge was that Apple will roll out variable pricing for digital songs on iTunes. Songs will be priced between 79 cents and $1.29. Previously, all songs were 99 cents.
Apple shares finished down 1.7 percent.
Dow Chemical gained 6.6 percent after the company said it would pursue its legal options over a a failed joint venture with Kuwait's Petrochemical Industries. The deal had been a key part of the company's growth strategy.
General Electric shares rose 1.4 percent following news that the company's finance arm plans to sell $10 billion in FDIC-backed debt, the largest sale under the government loan guarantee program so far. (GE is the parent company of CNBC.)
A day after dismal December auto sales that nonetheless beat analyst expectations, Toyota Motor said it was suspending production in Japan for 11 days.
General Motors said its sales in China for 2008 were up 6 percent but slowing.
American depositary shares of Logitech International slipped 5.9 percent after the world's largest computer mouse manufacturer cut its 2009 forecast and said it would be cutting jobs.
Shares of Talbot's jumped 33 percent after the women's apparel retailer said it has secured a total of $150 million in committed lines of credit.
Retailers will be in focus this week as big chains report their December sales, which is expected to show one of the worst holiday seasons on record.
"I think we are going to see a whole new color of ugly," retail analyst Patricia Edwards of Storehouse Partners, told Reuters.
Wal-Mart , the star of the season, is expected to show a 2.8 percent increase in December same-store sales, while teen and children's retailers are expected to have done the worst with a 15-percent decline. Overall, retail sales are expected to have dropped 7.1 percent, according to Thomson Reuters.
Investors are bracing for a new wave of store closings and bankruptcies in 2009. The International Council of Shopping Centers estimates that 73,000 stores will close in the first half, following 148,000 in all of 2008.
Energy was also in focus. Natural gas futures rose more than 1 percent after Russian gas supplies to some EU countries fell sharply.
Light, sweet crude settled at $48.58 a barrel, after hitting a one-month high above $50 a barrel earlier amid concerns about situations in the Mideast and Russia.
Still to Come:
WEDNESDAY: Weekly mortgage applications; ADP employment report; weekly crude inventories; Earnings from Constellation Brands, Family Dollar, Monsanto and Bed, Bath & Beyond; MacWorld (Jan. 5-9)
THURSDAY: ECB and BOE rate decisions; Chain-store sales; weekly jobless claims; consumer credit; Consumer Electronics Show begins (Jan. 8-11)
FRIDAY: Jobs report; wholesale trade; Earnings from KB Home
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