Stocks closed off session highs, yet the Dow still hit its highest level since before Lehman Brothers collapsed as Treasury yields soared in the wake of the Federal Reserve's reaffirmation of its decision to buy bonds to stimulate the economy.
The market had been higher earlier after a handful of strong economic reports and despite disappointing earnings results from Best Buy.
The Dow Jones Industrial Average rose 47.98 points, or 0.42%, to close at 11,476.54, the highest close since September 8, 2008.
Kraft, Microsoft and Boeing led blue-chips higher, while Coca-Cola and JPMorgan fell.
The S&P 500 rose 1.13 points, or 0.09 percent, to close at 1,241.59. The broad market index rose six days in a row, and also reached its highest level in two years. The Nasdaq gained 2.81 points, or 0.1 percent, to close at 2,627.72.
The CBOE Volatility Index, widely considered the best gauge of fear in the market, rose above 17.
Most of the key S&P sectors advanced, led by telecom,health care, and industrials, but financials and energy slipped.
The statement by the Federal Reservewas not changed from the previous meeting, when the Fed announced it would begin a $600 billion program to support the economy through purchases of long-term bonds.
Economists did not expect the central bank would waver from the current program and no change in interest rates was expected.
"I would have thought there would have been more spirited defense relative to the sharp run up we’ve seen particulary in bond rates," said Bruce McCain, chief investment strategist at Key Private Bank. "There was very little in the statement that would have reassured inflation hawks."
Treasury prices fell after the Fed meeting, sending the yield on the 10-year security up to 3.45 percent.
The dollar rose slightly against a basket of currencies, while the euro fell. The stronger dollar led to gold easing gains to about $1,397 an ounce, down from an earlier one-week high of $1,406.65. Oil, meanwhile, fell to just over $88 a barrel.
“The stock market’s looking good for the next two quarters relative to bonds,” Wayne Copelin, founder and president of Copelin Financial Advisors told CNBC. “We started lightening our bond positions since September.”
General Electric's shares pared gains, but remained higher, after releasing guidance for next year at its annual outlook for analysts and investors. The diversified company expects total revenue will be flat to up 5 percentnext year.
Best Buy shares plunged after the consumer electronics chain reported a lower-than-expected profit on a surprise drop in sales at established stores and a decline in its U.S. market share.
Best Buy's performance was hurt by a decline in electronics, particularly televisions. Related stocks slumped on the news, including Corning , which makes components for televisions, and Sony , which makes televisions. Best Buy rival Radioshack also fell.
Comcast gained after two brokerages raised their ratings on the Internet and cable company. Nomura started Comcast with a "buy" rating and a $25 price target, and while Bernstein raised Comcast to "outperform" from "market perform," and boosted its price target to $26 a share from $20.
Nomura, which began covering the cable and satellite industry with a "neutral" rating," initiated Cablevision with a "buy" rating and $40 price target and TimeWarner with "buy" rating and an $80 price target. DirecTV and DISHNetwork were started with "neutral" ratings.
AIG soared to the top of the S&P 500, rising more than 6 percent. AIG's expected secondary offering of shares to the public to repay the government for some $180 billion is likely to take place in March or April and underwriters are beginning to jockey for the deal, which will reportedly be between $10 billion and $15 billion, according to CNBC. The shares also hit a 52-week high.
Meanwhile, a handful of major banks were lower including JPMorgan and Citigroup .
And among regionals, Huntington and First Horizon National declined after both banks sold stock to repay the government. The stock sales were sold at a discount to Monday's closing stock prices.
SunTrust, Regions Financial, Marshall & Ilsley and Zions were trading lower. All the above regionals owe more than $1 billion to the government.
On the tech front, shares of Research In Motion gained after Wedbush raised the Blackberry maker's price target to $58 a share from $51, and FBN Securities raised its rating on the company to "outperform" from "sector perform."
Yahoo fell after news the Internet site said it will lay off more than 600 employeesas soon as Tuesday. The cuts will come mostly from the product group, Reuters reported.
And Netflix slumped for the second day in a row to its lowest level in about three weeks.
In health care news, Emergency Medical Services shares soared after the provider of emergency medical services confirmed it was reviewing strategic alternatives.
Amgen rose after the biotech firm reported successful resultsfor Xgeva, a drug to prevent bone complications in prostate cancer patients.
Pfizer named George Lorch as its chairman and also raised its dividend more than 10 percent.
The Carlyle Group's HCR ManorCare sold most of its real estate assets to HCP , a health care real estate investment trust in a $6.1 billion sale and leaseback deal, according to Reuters. Carlyle and ManorCare's management will remain as owners of the operating company.
Williams Partners shares tumbled more than 3 percent after the natural gas transporter said it will sell 7.5 million units in a public offering. The proceeds will be used to pay debt and fund part of a recent acquisition.
In the day's economic news, retail sales rose 0.8 percent in November, according to the Commerce Department. Excluding auto sales, retailers gained 1.2 percent. Economists surveyed by Reuters had expected retail sales to rise by 0.6 percent.
Retailers were mostly higher following the report. Among apparel companies, Ann Taylor, Abercrombie & Fitch and Urban Outfitters rose, although Zumiez and Talbots fell. Most high end retailers all advanced, including Coach, Saks and Nordstrom.
Volume on the consolidated tape of the New York Stock Exchange was 4.1 billion shares, while 958 million changed hands on the NYSE floor.
Also, business inventories rose 0.7 percentto $1.42 trillion in October, less than expected, the Commerce Department said Tuesday. Inventories were at their highest level since February 2009. Inventories rose an upwardly revised 1.3 percent in September.
Producer prices, meanwhile, rose 0.8 percent in November, more than expected as energy prices soared, according to the Labor Department. Core PPI, which excludes food and energy costs, rose 0.3 percent, slightly above an expected 0.2 percent rise.
Confidence among U.S. small business owners continued to rise, reaching a three-year high last month, according to the National Federation of Independent Business. An optimism index put out by the group rose 1.5 points to 93.2, the highest reading since December 2007.
In global markets, European stocks rose for the seventh straight session on Tuesday on the encouraging U.S. retail sales figures, while the major markets in Asia finished higher.
On Tap This Week:
WEDNESDAY: CPI, credit card default rates, MBA mortgage applications, New York manufacturing survey, industrial production, housing market index, oil inventories; Honeywell's 2011 outlook and Atlanta Fed Pres Lockhart speaks.
THURSDAY: Housing starts, jobless claims, Philadelphia Fed survey; before-the-bell earnings from FedEx, General Mills; after-the-bell earnings from Oracle, Accenture, Research In Motion, and Take-Two.
FRIDAY: Leading indicators, quadruple witching.
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