Stocks eked out a gain Thursday after a rough morning as banks got a boost from market chatter that the government may suspend a controversial accounting rule blamed for much of the contagion in the financial industry.
Retailers also helped to buoy the market after delivering better-than-expected January sales reports.
The Dow Jones Industrial Average rose 106.41, or 1.3 percent, to close at 8,063.07, reclaiming most of what it lost in the prior session. The S&P 500gained 1.5 percent, and theNasdaq jumped 2.1 percent.
The Securities and Exchange Commission might suspend the so-called mark-to-market accounting rules to which banks attribute much of the difficulty in pricing distressed assets, traders say.
"We are aware of chatter in the markets that Senate banking Chairman Christopher Dodd is strongly considering suspending mark-to-market accounting rules for illiquid assets that are on bank balance sheets," John Brady, senior vice president at MF Global, said on CNBC.
"That's sort of helping banking stocks here in the very short term, but really I think the equity markets want to see some clarity from Washington policy makers before bouncing further."
Also, Senate Democrats are indicating that a deal could be near on President Obama's $800 billion stimulus proposal, another uncertainty for Wall Street. And a smaller bank-aid packageis expected to be unveiled on Monday.
The market approached the November lows earlier and, keeping in line with recent trading trends, bounced off and turned positive.
Financials dramatically turned course, with Bank of America gaining 3 percent, after being down as much 10 percent earlier.
JPMorgan gained 2.1 percent, while Citigroup added 1.2 percent.
State Street, the world's largest institutional money manager, slashed its dividend and cut its outlook on worse than expected losses in commercial paper and investments. But shares jumped 14 percent as investors focused on statements from the company that the changes would help steady the bank's financial picture.
Wells Fargo shed 6.8 percent.
Retailers rallied after chain stores delivered better-than-expected January sales.
Wal-Mart shares jumped 4.6 percent after the world's largest retailer said its sales in January grew 2.1 percent, a full percentage point ahead of expectations.
Macy's shares gained 5.2 percent after the department-store giant reported same-store sales fell 4.5 percent, narrower than analysts had estimated.
In tech land, Akamai shares surged 18 percent after the company, whose technology helps companies run web sites and online businesses, beat earnings estimates and issued solid guidance. Goldman Sachs raised its price target on the stock but kept it on its "sell" list.
Investors also snapped up shares of technology bellwethers, including Apple and Cisco Systems, as a loosening up of lending would boost both consumer and business spending.
Electronic Arts gained 8.3 percent as investors gave a thumbs-up to news that the company was laying off 1,100 workers and tightening its belt across the board.
Microsoft shares rose 2.2 percent, after starting the day lower. Caterpillar , the construction equipment leader that has been battered lately, gained 3.3 percent.
Health-insurance companies also participated in the rally after Cigna beat earnings expectations. Its shares jumped 19 percent.
In economic news, initial jobless claims jumped by 35,000to 626,000 last week, the highest since October 1982 and much higher than economists had expected. Meanwhile, productivity jumped 3.2 percent in the fourth quarter, more than three times the 0.9-percent increase expected, but factory orders for December slumped 3.9 percent, closing out the worst year since 2002.
This comes a day ahead of the January employment report; economists expect that half a million jobs more were shaved from nonfarm payrolls.
Slightly better news came from the housing sector, where a bottom for the housing market in the US is in sight and likely in the fourth quarter, according to a report by Moody's Economy.com.
The Bank of England continued its race to the bottom and cut by another half a percentage point to 1 percent Thursday despite a falling pound and the risk of inflation. But the European Central Bank, the most reluctant among major central banks to lower rates, stood pat.
Still to Come:
FRIDAY: December jobs report; consumer credit
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