Stocks ended sharply higher as the Dow and the S&P 500 hit new multi-year highs, easily erasing losses from Friday's sharp sell-off on turmoil in Egypt as investors focused on upbeat earnings and economic news.
The Dow Jones Industrial Average rose 148.23 points, or 1.25 percent, to close at 12,040.16 in the wake of posting the best January since 1997. The last time the Dow closed above 12,000 was June 19, 2008, while the first time the Dow closed above the benchmark was October 19, 2006.
Most Dow components gained, led by Pfizer, Alcoa and Bank of America .
The S&P 500 rose 21.47 points, or 1.67 percent, to close at 1,307.59. The last time the S&P 500 closed above 1,300 was Aug. 28, 2008, although it came close last Thursday, just before the turmoil in Egypt sent it spiraling down 1.8 percent. Tuesday's close was the highest since June 25, 2008.
The Nasdaq rose 51.11 points, or 1.9 percent, to close at 2,751.19.
The CBOE Volatility Index, widely considered the best gauge of fear in the market, fell more than 9 percent to below 18. The VIX had climbed 24 percent last Friday as the unrest in Egypt escalated.
All key S&P 500 sectors gained, led by materials, financials and health care.
The dollar slipped against a basket of currencies, as the euro hit a 2 1/2-month high against the U.S. currency. The price of gold, meanwhile, gained to close above 1,339 an ounce.
The gains in the market Tuesday follow subsiding fears over the unrest in Egypt, where protests by thousands in Cairowent off peacefully. Citizens have been calling for the resignation of President Hosni Mubarak in demonstrations that started last Tuesday. Mubarak said in a speech that he will step down at the next election, but would stay in office until then, according to Al Arabiya TV.
The market rally was fueled by investors who were buying back positions that had been shed Friday when the protests in Egypt escalated, Brian Battle, vice president of trading at Performance Trust Capital Partners, told CNBC.com. With the future of Egypt uncertain, investors didn't want to be overexposed heading into the weekend, Battle said.
But with the situation in Egypt stabilizing, nobody wanted to get in the way of the market grinding higher, particularly as economic and earnings data continue to be strong, he said.
"The trend certainly is higher, and nobody wants to stand in the way of that," Battle said.
Longer term, there are reasons to be skeptical, however, he added, citing high unemployment, sluggish housing, and emerging food and energy inflation. The prices paid index in a report on nationwide manufacturingrose in January to the highest level since July 2008.
"That’s raw material inputs, so margins will get squeezed," he said.