Stocks gave up their earlier rally to end mixed on the first day of the fourth quarter, with the Nasdaq closing in negative territory, but a better-than-expected manufacturing report helped limit losses.
“The risk is to the downside—October is a volatile month with risk to the downside because the economic data’s not getting better,” said Kenny Polcari, managing director of ICAP Equities. “But the market won’t fall out of bed because central banks around the world will continue to shovel money.”
The Dow Jones Industrial Average gained 77.98 points, or 0.58 percent, to close at 13,515.11, led by UnitedHealth Group and American Express, after soaring more than 4 percentin the third quarter. The blue-chip index was up more than 150 points during its session high.
Despite October being a "jinx month" because of major crashes in 1929 and 1987, the Dow has not posted an October loss since 2008.
The S&P 500 edged up 3.82 points, or 0.27 percent, to end at 1,444.49. The Nasdaq slipped 2.70 points, or 0.09 percent, to finish at 3,113.53.
The CBOE Volatility Index, widely considered the best gauge of fear in the market, ended above 16.
Among the key S&P sectors, consumer staples led, while utilities and techs sagged.
“Honestly, I think the rally this morning was an overreaction,” said Polcari. “ISM was better than expected, but how did the number come out positive while every other regional survey has been negative? The market’s reassessing today’s numbers and it’s going to re-price.”
(Read More: Stock Market May Be Headed for Rude Shock This Month)
The manufacturing sector expanded for the first time since May, with the ISM index rising to 51.5 in September from 49.6 in August. Economists had expected a reading of 49.7, according to a Reuters survey. A reading above 50 indicates an expansion.
The ISM survey followed a string of weak regional surveys last month. The Chicago PMI, a survey which measures business activity in the Midwest, showed its first contraction since 2009 in September.
Meanwhile, Federal Reserve Chairman Ben Bernanke defended the central bank’s bond-buying stimulus program, speaking at the Economic Club of Indiana, saying its actions were necessary. Bernanke added that the Fed does foresee a recession but that growth was too slow to bring down the nation's jobless rate.
“There was explanation, defense and frustration combined in [Bernanke’s speech],” said Art Cashin, director of floor operations at UBS Financial Services. “He [also] had an upbeat mood to it and it seemed to go well, but I didn’t see compelling new evidence that would have some of the critics say ‘I never understood it like that before.’”
Overnight, PMI data from China and the euro zone showed some signs of stabilization though both remained firmly in contraction mode.
European shares ended sharply higher as worries over Spanish bank eased. Investors have been watching to see if Moody's would downgrade Spain's credit rating, but the ratings agency said Spain's bank recapitalizations were credit-positive for the country.
Meanwhile, the euro zone PMI was revised up to 46.1, up from a preliminary estimate of 46 and from a reading of 45.1 in August. Still, the reading was below 50, which indicates a contraction. The improvement helped the eurostabilize against the dollar.
AndChina's official PMI rose to 49.8 in September from 49.2 in August, but it was the seventh straight quarter of slowing growth for the world's second-largest economy.
Goldman Sachs gained after a Barron's article over the weekend said the investment bank's shares could rise 25 percent in the next year as capital markets improve. Meanwhile, Guggenheim initiated coverage of Citigroup with a "buy" rating and a $45 price target.
Among techs, Google closed at an all-time high, making the search-engine giant's stock the second largest on the Nasdaq 100 index after topping Microsoft's market cap earlier in the session. Google has soared more than 15 percent year-to-date.
Microsoft ended lower after Jefferies and RBC cut their price targets on the company to $34 from $35 and to $33 from $34, respectively. RBC also downgraded its rating on the stock to "sector perform" from "outperform." Separately, the company is expected to launch its own news servicelater this month, according to a Reuters report.
Apple CEO Tim Cook thanked his employees for "another incredibly successful year" in an email to employees and extended this year's Thanksgiving vacationwith pay. Cook announced a similar break extension last year.
Facebook advanced after the social-networking giant’s COO Sheryl Sandberg told CNBC the company’s ads are “incredibly effective” and have good return on investment.
Nokia jumped after the Finnish phone maker announced that it will allow Oracle's customers access to mapping services.
Tenet Healthcare rallied to lead the S&P 500 gainers after the company announced a one-for-four reverse stock split.
On the M&A front, Ceradyne shares surged after 3M said it will acquire the ceramic products manufacturer in a deal worth $670 million.
Also on the economic front, construction spending slumped by the most in a year, falling 0.6 percent in August to an annual rate of $837.1 billion, according to the Commerce Department. Economists had expected a gain of 0.5 percent.
—By CNBC’s JeeYeon Park (Follow JeeYeon on Twitter: @JeeYeonParkCNBC)
Coming Up This Week:
TUESDAY: Monthly auto sales
WEDNESDAY: Weekly mortgage apps, ADP employment report, ISM non-mfg index, oil inventories, H-P analysts mtg; Earnings from Family Dollar, Monsanto, Marriott
THURSDAY: Chain-store sales, Challenger job-cut report, jobless claims, factory orders, FOMC minutes
FRIDAY: Non-farm payrolls, consumer credit
More From CNBC.com: