Stocks ended up nearly a percent or more as investors flocked to stocks, pushing the market to new two-year highs for the first trading day of the year.
The Dow Jones Industrial Average rose 93.24 points, or 0.8 percent, to close at 11,670.75, the highest close for the blue-chip index since Aug. 28, 2008. Stocks had ended the year slightly below two-year highs with double-digit gains in each major index.
Bank of America, JPMorgan and Alcoa, led the Dow higher, while Intel and Coca-Cola lagged.
The S&P 500 rose 14.23 points, or 1.13 percent, to close at 1,271.87, the highest close for the broad market index since Sept. 3, 2008. Among key S&P 500 sectors, financials, telecom and consumer discretionary gained.
The Nasdaq gained 38.65 points, or 1.5 percent, to close at 2,691.52, the highest close since Dec. 26, 2007.
The CBOE Volatility Index, widely considered the best gauge of fear in the market, fell below 18.
The surge in trading Monday could portend good results for the year if recent history is a guide. Each time since 2000 that the S&P 500 index moved up or down 1 percent on the first trading day of the year, that day's gain or loss had a perfect positive correlation to how the market performed for the year, according to a CNBC analysis. In other words, if the S&P gained 1 percent on Jan. 1, the broad market index ended the year higher.
The Dow, meanwhile, has ended the year in the same direction as the first day in 16 of the last 19 years.
In 2010, the Dow gained 11.02 percent, the S&P 500 gained 12.78 percent, and the Nasdaq gained 16.91 percent. The year also ended with a bang: December was the best month for the Dow since December 2003, the best for the S&P 500 since December 1991, and the best for the Nasdaq since December 1999.
Analysts have generally been optimistic about 2011. Citigroup has raised its year-end target for the S&P 500 to 1,400, and for the Dow to 13,150, in part because of the strong December performance for stocks.
Citing solid corporate earnings growth and relatively low stock market valuations, UBS Wealth Management recently raised its earnings estimates for 2010 to $86 from $84, and for 2011 estimates to $96 from $90, and forecasted the S&P 500 Index would hit 1,350 by year-end, or 13 times UBS Wealth Management's 2012 earnings estimate of $104.
While largely optimistic in a note to client, the investment firm also sounded a cautious note. "Look for 2011 to feel a lot like 2011—stocks should grind higher but expect episodic setbacks along the way."
One headwind will be aging baby boomers leaving the "accumulation" phase of their lives and entering the "distribution" phase. But the firm sees many reasons to be positive, including improving profit margins and share buybacks.
In corporate news, Bank of America added to the enthusiasm for the first trading day, as the company's shares soared on news it paid $3 billion to settle claims regarding poorly underwritten mortgages sold to government sponsored entities Fannie Mae and Freddie Mac.
Financials overall started the year out strong, after leading the market in December with a 10.6 percent gain. The SPDR KBW Bank Exchange Traded Fund rose more than 2 percent on Monday.
Meanwhile, AIG declined slightly after Barron's reported that the stock could fall this year as the government sells the $70 billion in stock of the insurer that it holds.
Expedia and Orbitz sank after Soleil Securities cut their ratings on the online airline booking sites to "hold" from "buy," in the wake of the companies' decision not to list American Airlines fares, saying the airlines new pricing strategy will lead to "higher costs and reduced transparency" for consumers.
Molycorp soared after Dahlman Rose raised the U.S. rare earth metals producer's price target to $84 a share from $49.
Alcoa, meanwhile, rose after Deutsche Bank raised the aluminum producers to "buy" from "hold."
Goldman Sachs downgraded semiconductor and semiconductor capital equipment companies to "neutral" from " attractive," saying the stocks have significantly outperformed since 2008. Semiconductor stocks outperformed the S&P 500 by 17 percent, while equipment companies outperformed by 31 percent
Specifically, Goldman downgraded Analog Devices, Linear Technology, Lam Research, and KLA-Tencor to "neutral" from "buy" and removed Teradyne from the "conviction buy" list. The brokerage upgraded Varian Semiconductor Equipment Associates to "buy" from "neutral," and downgraded FormFactor to "sell."
Meanwhile, the semiconductor industry said the year closed at record sales and growth rates, according to Brian Toohey, Semiconductor Industry Association president. Toohey said the industry expects "continued moderation in sales growth."
In other tech news, Apple rose after Oppenheimer raised its price target for the maker of the iPad to $385 a share from $345, and boosted its full-year earnings estimate to $20.62 a share from $19.01. The brokerage cited the potential for Verizon to offer the iPhone later this year, and stronger iPad sales.
Apple shares had fallen before the market opened on news over the weekend of a glitchwith the iPhone's alarm.
And Facebook raised $500 million from Goldman Sachs and a Russian investor, a deal that values the company at $50 billion, the New York Times reported.
In reaction to news that Borders was delaying payments to vendors, publishing group Rowman & Littlefield said it will stop shipping books to the bookstore chain, the Wall Street Journal reported. S&P Equity Research downgradded Borders to "sell" from "hold." Shares of the bookseller, however, rose.
Meanwhile, same-store holiday sales for rival Barnes & Noble rose 9.7 percent.
Retail stocks mostly gained on Monday, but several fell after rating downgrades. Piper Jaffray downgraded Ann Taylor to "neutral" from overweight," while Jefferies cut several retailers, citing higher sourcing costs and "less compelling valuations." The brokerage cut Tiffany's, Coach and Urban Outfitters to "hold," and Aeropostale to "underperform."
Dollar General plans to expand across the country, opening 625 new stores and hiring 6,000 workers.
Both Office Depot and Staples gained after Janney Capital Markets raised both office supply chains to "buy" from "neutral."
Clorox , meanwhile, fell after the consumer products maker posted disappointing second quarter earnings as a result of sluggish sales.
And Tyson Foods slid after BMO Capital Markets cut the food producer to "market perform" from "outperform."
Oil surged to more than $92 a barrelon expectations the economy is poised to grow. While many analysts expect oil could reach $100 a barrel, few expect it to keep on surging to $150, as it did in 2008.
Energy stocks continued to rise on the news. Murphy Oil , Valero Energy, and Sunoco led the sector.
The dollar , meanwhile, rose against a basket of currencies, but trimmed gains after a report that manufacturing in the U.S. was strong, in line with expectations. Gold also started the year stronger, rising slightly to $1,422.60 an ounce.
Volume on the consolidated tape of the New York Stock Exchange was closer to normal levels with 4.3 billion shares changing hands. On the NYSE floor, 1.1 billion shares changed hands.
One reason for the market's upbeat tone was a report indicating manufacturing growth continues to strengthen. The Institute for Supply Management'smanufacturing index for December rose to 57, slightly better than the 56.9 expected by economists.
Looking under the hood, the data showed new orders and production rose above 60, and the gap between new orders and inventories widened, said Michael Sheldon, chief market strategist at RDM Financial Group in Westport, Conn.
That's a positive signal for future growth, Sheldon told CNBC.com. "When new orders are rising and inventories are falling, that indicates future demand in the economy will have to be met by increased production, thus boosting the economy," he siad.
The market also may be getting a boost as investors move money out of bonds and into stocks, he added.
"Fund flows into equities have been pretty light, but if the economy continues to get better, we could finally start to see U.S. investors put a toe back in the water, which could provide a lift to the equity markets in 2011," Sheldon said.
Still, investors should remain aware of global risks facing the economy, as well as the unknown outcome for growth once the Federal Reserve and Congress "eventually take away the punch bowl," he said. The Fed's stimulus program—buying $600 billion in long-term securities—winds down at the end of the second quarter.
Also in U.S. economic news, construction spending rose 0.4 percent, up from a 0.7 percent gain in October, and better than the 0.2 gain expected by analysts.
Investors also absorbed news that China's purchasing managers' index fell, an indication growth slowed. But some investors took heart that the news would forestall rate increases by the Chinese government.
Asian markets rose broadly, although China, Australia and Japan were closed for holidays. European stocks also gained, but London was closed in observance of the New Year.
On the Calendar Next Week:
TUESDAY: Auto sales, factory orders, FOMC minutes, API weekly report; earnings from Mosaic.
WEDNESDAY: MBA mortgage applications, Challenger job-cut report, ADP employment report, ISM non-manufacturing index, oil inventories; earnings from Family Dollar. Kansas City Federal Reserve President Hoenig speaks.
THURSDAY: Chain store sales, Monster employment index, ECB announcement, jobless claims, natural gas inventories, Treasury STRIPS, money supply; earnings from Monsanto.
FRIDAY: Nonfarm payrolls report, consumer credit; Federal Reserve Chairman Bernanke speaks, Federal Reserve Vice Chairman Janet Yellen speaks.
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