Stocks closed higher on Monday, with financials and materials leading, as investors digested economic data while looking for clues about the Federal Reserve's next move.
"I think the market is suggesting that the Fed isn't going to be able to raise rates," said Jeffrey Saut, chief investment strategist at Raymond James. "I think the real story is, even if they do raise rates, it will be because the economy is getting better."
"I think the market is reassessing the Fed, said Quincy Krosby, market strategist at Prudential Financial. "The market sold off on Friday on the back of the idea that Stanley Fischer trumped Janet Yellen, ... but when you look at Fed funds futures, the market is still expecting one rate hike, perhaps in December."
The Nasdaq composite advanced approximately a quarter of a percent.
"I think the market is kind of telling you that next year will be OK," said Maris Ogg, president at Tower Bridge Advisors, adding corporate year-over-year comparables would be much easier. "Q3 was the start of the big oil decline and there were people worried that [oil] was going to drag the banks lower."
Consumer spending in the U.S. rose 0.3 percent in July, in line with expectations. The personal consumption expenditures (PCE) price index, the Fed's preferred inflation indicator, rose 0.1 percent last month and is up 1.6 percent over the 12 months through July.
"The good news is the market is reacting positively to positive economic news," said Art Hogan, chief market strategist at Wunderlich Securities.
Mariann Montagne, senior investment analyst at Gradient Investments, echoed Hogan's comments and noted "it's very good for the banks." "I think the market was encouraged by Janet Yellen's view on the economy."
There are no more economic data due Monday, but investors are already looking ahead to the August jobs report, due Friday, as the odds of a rate hike next month have recently increased.
Market expectations for a Fed rate hike in September were at 24 percent Monday, after ending near 30 percent Friday, according to the CME Group's FedWatch tool.
On Friday, Fed Vice Chairman Stanley Fischer said Friday's jobs report would weigh on the Fed's decision to increase rates. Fischer made his remarks shortly after Chair Janet Yellen said the case for higher rates has strengthened "in recent months."
"What we're seeing here is a market that's focusing on the Fed," said Peter Cardillo, chief market economist at First Standard Financial. "But I think this directionless market ... is due to seasonal factors," he added, referring to low trading volumes ahead of the U.S. Labor Day holiday.
At the close, Monday was on pace for the lowest trading volume day of the year.
Cardillo also said he doesn't expect the Fed to move in September, "but I do expect one [rate hike] by the end of the year."
U.S. stocks continued to hold in a tight range, as the S&P posted its 36th straight session without closing 1 percent higher or lower on Monday. Last week, the three major indexes posted a weekly loss, with the Nasdaq snapping an eight-week winning streak.
"Interestingly last week, the market reacted the way it should've, with financials, leading," said Wunderlich's Hogan. "I think we're at a point in the cycle where ... we're looking at at least one rate hike and maybe two."
U.S. Treasuys rose broadly, with the two-year note yield near 0.81 percent and the benchmark 10-year yield around 1.56 percent.
Oil markets fell Monday, weighed in part by a rising dollar, as U.S. crude settled more than 1.39 percent lower at $46.98 a barrel. The dollar traded flat against a basket of currencies, after rising slighlty, with the euro near $1.118 and the yen around 101.95.
In corporate news, Mylan said it would launch an EpiPen generic at a 50 percent discount to the branded product's list price. The pharmaceutical firm has been under amid the rapid price increases for the EpiPen.
Meanwhile, activist investor Carl Icahn said late Friday he bought 2.3 million shares of Herbalife after Bill Ackman said he was approached indirectly by Icahn to buy the billionaire's stake in Herbalife.
Overseas, European markets closed mostly lower in thin trading, as U.K. markets were closed for a holiday. In Asia, the Nikkei 225 surged more 2.3 percent, while the Shanghai composite closed flat.
The Dow Jones industrial average gained 107.59 points, or 0.58 percent, to close at 18,502.99, with DuPont leading advancers and Nike the greatest laggard.
The rose 11.34 points, or 0.52 percent, to 2,180.38, with financials leading all sectors higher.
The Nasdaq advanced 13.41 points, or 0.26 percent, to end at 5,232.33.
About three stocks advanced for every decliner at the New York Stock Exchange, with an exchange volume of 648 million and a composite volume of 2.593 billion at the close.
The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near lower, near 13.1.
Gold futures for December delivery settled $1.20 higher at $1,327.10 per ounce.
High-frequency trading accounted for 49 percent of August's daily trading volume of about 6.14 billion shares at Friday's close, according to TABB Group. During the peak levels of high-frequency trading in 2009, about 61 percent of 9.8 billion of average daily shares traded were executed by high-frequency traders.
On tap this week:
*Planner subject to change.
9 a.m. S&P/Case-Shiller home prices
10 a.m. Consumer confidence
Earnings: Brown-Forman, Salesforce.com, Five Below, Shoe Carnival, Bob Evans, National Bank of Greece, Chico's
8 a.m. Minneapolis Fed President Neel Kashkari
8:15 a.m. ADP employment
9:45 a.m. Chicago PMI
10 a.m. Pending home sales
August vehicle sales
3:15 a.m. Boston Fed President Eric Rosengren, Chicago Fed President Charles Evans in Beijing
8:30 a.m. Initial claims; Productivity and costs
9:45 a.m. Manufacturing PMI
10 a.m. ISM manufacturing; Construction spending
12:25 p.m. Cleveland Fed President Loretta Mester
8:30 a.m. August Employment report
8:30 a.m. U.S. trade deficit
10 a.m. Factory orders
1 p.m. Richmond Fed President Jeffrey Lacker