Stocks eased off their best levels Monday but still finished sharply higher, boosted by news that Larry Summers had pulled out of the race to be the next head of the Federal Reserve. The Nasdaq finished lower, dragged by sharp losses in Apple.
(Read more: After-hours buzz:Pandora, Outerwall, Nvidia & more)
The Dow Jones Industrial Average rallied 118.72 points, to close at 15,494.78, led by Boeing and General Electric. The Dow is on track for its best monthly gain since January.
Meanwhile, tech companies Hewlett-Packard, Microsoft and Intel put a damper on the Dow's gains.
The jumped 9.61 points to finish at 1,697.60. The index earlier crossed above 1,700. The Nasdaq fell 4.34 points to end at 3,717.85, reversing its initial gains after rallying to a fresh 13-year high near the open. The Russell 2000 index hit an all-time high.
Meanwhile, trading was temporarily halted across options markets around 1:40 pm ET due to system issues at Options Price Reporting Authority (OPRA), which disseminates quotes to vendors. Trading in options was restored at major exchanges almost an hour later.
The options halt is the second major glitch effecting securities prices in the last month.
The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, ended above 14.
Most key S&P sectors closed in positive territory, led by industrials and financials, while techs ended in the red.
"The market's excited about more stimulus, or at least less aggressive tightening, and that's provided spark for the equity markets," said Michael Sheldon, chief market strategist at RDM Financial Group. "But while today's rally is encouraging, it will be interesting to see if we can hold onto all of this morning's gains."
Summers' surprise decision bolstered risk appetite as investors had expected him to take a more hawkish course regarding stimulus than other candidates if appointed. This leaves Fed Vice Chairman Janet Yellen as the front runner for the job. A well-known policy dove, Yellen would be expected to continue Bernanke's easy money policies.
(Read more: Wall Street wanted Yellen anyway: CNBC survey)
"The market will, at the margin, see his withdrawal as one which prolongs unorthodox policy for longer — partly because it moves the more dovish Yellen up the favorites list for the new job," said Deutsche Bank's Gael Gunubu in a research note.
Yields on U.S. government debt fell to their lowest levels so far in September following the news. Benchmark 10-year bond yields declined 8 basis points to 2.805 percent, near its session low and the lowest in two weeks.
Shares of homebuilders including Pulte and DR Horton spiked following the announcement. Summers was expected to rein in the government's stimulus program, which could have pushed interest rates higher, including rates for mortgages.
(Developing: 12 confirmed dead in DC Navy Yard shooting rampage)
Investors will be closely watching the two-day Federal Open Market Committee meeting, which ends on Wednesday. The central bank is expected to announce the start of the tapering in its monetary stimulus program. The latest Reuters poll showed economists expect the central bank cut its bond purchases by $10 billion, from the current $85 billion per month.
(Read more: Here it comes: Are you ready for the Fed to taper?)
JPMorgan gained after the banking giant agreed to pay at least $700 million in London Whale-related fines, according to a report from Dow Jones.
Facebook ticked higher after Goldman Sachs raised its price target on the social-networking giant to $52 from $46. Facebook shares have rallied nearly 8 percent just this month alone.
Meanwhile, Apple was among the few companies trading in the red following a report that a major Chinese carrier is offering a smaller subsidy for the new iPhones than in the past.
On the economic front, the pace of growth in New York state's manufacturing sector unexpectedly slowed in September, according to a report from the New York Federal Reserve. The New York Fed's "Empire State" general business conditions index slipped to 6.29 from 8.24 in August, shy of economists' forecast of 9.20.
Meanwhile, industrial production rose 0.4 percent in August after being flat in July, according to the Federal Reserve. The gain was in line with expectations.
—By CNBC's JeeYeon Park (Follow JeeYeon on Twitter: @JeeYeonParkCNBC)
On Tap This Week:
TUESDAY: CPI, Treasury int'l capital, housing market index, FOMC mtg begins; Earnings from Adobe Systems
WEDNESDAY: Mortgage applications, housing starts, oil inventories, FOMC mtg announcemnet, FOMC forecasts, Bernanke press conference, Apple iOS 7 available; Earnings from FedEx, General Mills, Oracle
THURSDAY: Jobless claims, current account, existing home sales, Philadelphia Fed survey, leading indicators, natural gas inventories, Fed's Pianalto speaks, Fed balance sheet/money supply, Microsoft analyst mtg, Nike shareholder mtg, weekly rail numbers; Earnings from ConAgra, Rite Aid
FRIDAY: Fed's George speaks, Fed's Bullard speaks, Fed's Kocherlakota speaks, quadruple witching, new iPhones in stores
What's Trending on CNBC.com: