The Dow Jones industrials rose more than 100 points in the early going, but pared its gains following mixed readings on the service sector, factory orders and pending home sales. While investors expected the data to show further deterioration, they were hoping the pace of the declines would slow. The market is eager for signs that the U.S. recession will end this year.
But stocks rebounded midafternoon after the Federal Reserve released the minutes from its December meeting, providing insight into the central bank's historic decision to ratchet down its key interest rate to near zero.
According to the documents, Federal Reserve officials feared the economy would be stuck in a painful rut for some time. This led Fed Chairman Ben Bernanke and his colleagues to create a target range for its rate, putting it at zero to 0.25 percent.
The Fed, which has begun buying mortgage-backed securities, also said at the time it was considering buying other types of securities, too, such as Treasurys.
"I think this statement clearly indicates they are going to continue to try to get rates lower and move people into riskier assets," said Peter Cardillo, chief market economist at Avalon Partners. "The minutes point out the fact that they are using every tool available and expanding their balance sheet."
Earlier Tuesday, the National Association of Realtors said that pending home sales fell to the lowest level on record in November. The trade group said its seasonally adjusted index of pending sales for existing homes fell 4 percent to 82.3 from a downwardly revised October reading of 85.7 in October. That's worse than the reading of 88 that economists expected, according to Thomson Reuters.
Meanwhile, the Commerce Department said factory orders declined by 4.6 percent in November, nearly double the 2.5 percent dip economists expected. The drop marks a record fourth straight month of declines.
One bright spot among the day's reports: the Institute for Supply Management said the U.S. services sector contracted at a slower pace last month. The trade group of purchasing executives said its services sector index rose to 40.6 in December from 37.3 in November. Wall Street economists had expected the index to slip slightly to 37.
The index continues to signal the sector is contracting, however. A reading below 50 signals contraction, while a reading above 50 indicates growth.
In midafternoon trading, the Dow Jones industrial average rose 93.11, or 1.04 percent, to 9,046.00. The Standard & Poor's 500 index rose 11.35, or 1.22 percent, to 938.80, while the Nasdaq composite index advanced 32.19, or 1.98 percent, to 1,660.22.
The Russell 2000 index of smaller companies rose 11.12, or 2.20 percent, to 516.15.
Tuesday's advance follows a recent pattern in which investors have largely shrugged off weak economic data. Wall Street has been showing some signs of stability since hitting multiyear lows on Nov. 20; the Dow is up 18.5 percent since then, while the S&P 500 index is up 23.3 percent. But analysts are quick to note that the market is not out of the woods yet.
"We've had sort of a positive correction," said Brian Gendreau, investment strategist at ING Investment Management. "The question is, is this the beginning of a sustained bull market? I would suspect not."
Investors are hoping for an economic recovery later this year. Any signs that the recession will extend beyond that could rattle the market, analysts say.
"I think people are cautiously optimistic," said Ben Halliburton, chief investment officer at Tradition Capital Management. "They are hopeful that the Obama administration is going to get the economy back on track. But I think the speed at which they get things back on track might be slower than the current consensus believes."
On Monday, the Dow fell 81 points, giving back some of its gains from last week's rally in which all the major indexes rose more than six percent. Investors were encouraged, though, about President-elect Barack Obama's calls for an economic stimulus package.
Though investors are hopeful that Obama's plans for big tax breaks and public works programs will boost the economy, analysts expect Wall Street to remain on edge in the coming weeks, ahead of corporate earnings reports. Investors will be looking to glean any insight into companies' expectations for the coming year.
"People are really undecided on what '09 is going to look like from an earnings perspective," said David Waddell, senior investment strategist and chief executive of Waddell & Associates. "(The market) could get a bit more pessimistic depending on how ugly the fourth quarter is. The surprise would be if things aren't as bad as we think."
Bond prices retreated Tuesday. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 2.53 percent from 2.48 percent late Monday. The yield on the three-month T-bill, considered one of the safest investments, rose to 0.13 percent from 0.09 percent.
Advancing issues outnumbered decliners by about 4 to 1 on the New York Stock Exchange, where volume came to 839.88 million shares.
The dollar was mixed against other major currencies. Gold prices rose.
Light, sweet crude for February delivery slipped 11 cents to $48.70 a barrel on the New York Mercantile Exchange.
In Asian trading, Japan's Nikkei stock average rose 0.42 percent, and Hong Kong's Hang Seng index dipped 0.35 percent. In European trading, Britain's FTSE 100 rose 1.29 percent, Germany's DAX index rose 0.85 percent, and France's CAC-40 rose 1.08 percent.