Now investors seem to be saying, maybe things aren't so bad after all.
Some better-than-expected retail earnings reports and the latest reading on the housing market drew investors back into the stock market Tuesday after the previous day's big sell-off. The major indexes rose about 1%, led by a surge in financial and technology companies.
Investors were still wary about consumer spending and its impact on the economy but heard enough good news to fuel the comeback from Monday's 186-point slide in the Dow Jones industrials. Analysts said investors were putting things in perspective, believing the pullback was a bit overdone.
The U.S. market was also taking some cues from overseas exchanges, which got a boost from encouraging news about the German economy. And bond prices retreated as investors' anxiety eased.
"The outlook for the economy doesn't change every 24 hours," said Alan Skrainka, chief market strategist at Edward Jones. "The news is always mixed even after you've hit bottom."
Investors have been battling mixed signals on the economy for several weeks; housing and manufacturing have been improving, but consumer spending is still sagging. On Monday, stocks fell by the biggest amount in six weeks as investors' growing fears that consumers won't spend enough to lift the economy into recovery caught up with them.
The earnings reports from retailers on Tuesday showed that American consumers are still shy about spending, but results weren't quite as bad as analysts expected and that helped calm some of investors' nerves.
Meanwhile, the Commerce Department reported that construction of new homes and apartments fell more than expected last month, but construction of single-family homes actually rose 1% to the highest level since October 2008. It was the fifth straight monthly increase.
Analysts have warned that the market has gotten ahead of itself and that some pullback is inevitable, given the more than 40% climb in stocks since March and the challenges that still exist in high unemployment and waning consumer confidence. But the market continues to show resilience, with any retreat in stocks being brief.
The Dow rose 82.60, or 0.9%, to 9,217.94. The Standard & Poor's 500 index gained 9.94, or 1%, to 989.67, while the Nasdaq composite index rose 25.08, or 1.3%, to 1,955.92.
In other trading, the Russell 2000 index of smaller companies rose 8.25, or 1.5%, to 556.43.
About four stocks rose for every one that fell on the New York Stock Exchange, where consolidated volume came to an extremely light 4.28 billion shares, down from Monday's 5 billion.
Overseas markets also rebounded from steep declines on Tuesday. Japan's Nikkei stock average rose 0.2%, a day after Japanese economists and politicians unnerved investors with their cautious stance on the economy, despite a government report showing Japan had emerged from a year-long recession in the second quarter.
Major European indexes rose after a research institute reported that consumer confidence is rising in Germany, Europe's largest economy. Britain's FTSE 100, Germany's DAX index and France's CAC-40 all added 0.9%.
Meanwhile, bond prices dipped after the previous day's big gains, which were a response to investors' nervousness about the economy. The yield on the benchmark 10-year Treasury note, which moves in the opposite direction from its price, rose to 3.52% from 3.47% late Monday.
John Wilson, chief technical strategist at Morgan Keegan, said he's encouraged that investors keep seeing opportunities in the market's dips.
"Buying tends to come in a little quicker because people have missed the market," he said, referring to the surge in stocks that has taken the S&P 500 index up 12% in a little over a month and 45.5% since early March. Some investors have held off committing to stocks out of fear the market would go into reverse.
"The data is not going to all of a sudden turn positive," he said. However, "more and more people are beginning to embrace the fact that we're through the worst of the recession."
Investors once again bought stocks that depend on a healthy economy, including financial, industrial and technology companies. Gains in industries that tend to hold up better when the economy is weak, like health care and utilities, were more subdued.
Among technology stocks, Apple rose $4.41, or 2.8%, to $164.00.
The advance in bank stocks came a day after major lenders, including Bank of America and JPMorgan Chase, reported that losses among credit card loans are slowing.
Bank of America added 34 cents, or 2.1%, to $16.90, while JPMorgan rose 97 cents, or 2.4%, to $41.70.
Home Depot said its second-quarter profit fell 7%, but its adjusted results beat Wall Street's expectations, as cost cuts partly offset weak revenue. The world's largest home improvement retailer also lifted its forecast for full-year earnings.
Target's quarterly profit also fell but it surpassed analyst estimates. And TJX Cos. said its second-quarter profit rose 31% as its discount-oriented stores continued to lure in cost-conscious shoppers. Not all the reports were positive, though. Luxury department store Saks said its loss widened from a year earlier.
Home Depot rose 82 cents, or 3.1%, to $26.93. TJX shares lost $1.05, or 3%, to $34.33, while Target jumped $3.11, or 7.6%, to $44.32.
The dollar lost ground against other major currencies, while gold prices rose.
Oil prices were higher after dropping to a new monthly low on Monday. Light, sweet crude jumped $2.44 to settle at $69.19 a barrel on the New York Mercantile Exchange.