Investors rushed back into stocks as profits at a handful of companies indicated the economy might be gaining strength.
Gains in homebuilders, retailers and other consumer discretionary stocks led the market sharply higher Thursday. The Dow Jones industrial average surged 173 points after four days of losses. Government bond prices jumped after an auction drew strong demand.
Traders focused on several better-than-expected earnings reports and welcomed news that the Federal Reserve took the first step toward removing the numerous emergency lending programs it launched last fall at the height of the financial crisis.
The third successful Treasury auction of the week helped boost confidence that Washington will be able to raise enough money to fund its economic recovery programs.
Shares of homebuilders rallied after Lennar said orders for new homes jumped 63% during the second quarter and posted revenue that beat expectations.
Retailers and other consumer discretionary stocks jumped following an upbeat report from Bed Bath & Beyond. The home furnishings store said its fiscal first-quarter profit climbed 14% as sales rose after the liquidation of rival Linens N Things.
Stocks had started lower after the government said new claims for unemploymenet benefits rose rose by 15,000 to 627,000 last week. The market expected a drop.
Joe Saluzzi, co-head of equity trading at Themis Trading, said some of the day's gains likely reflect portfolio managers buying up stocks to pump up their returns ahead of the end of the quarter on Tuesday.
"I think the window dressing is a big deal," he said. "There's just a force underneath the market that wants to keep it higher."
The Dow rose 172.54, or 2.1%, to 8,472.40, after falling 40 points in the early going. The broader Standard & Poor's 500 index rose 19.32, or 2.1%, to 920.26, and the Nasdaq composite index rose 37.20, or 2.1%, to 1,829.54.
Uncertainty about when the economy will turn around and how much it might eventually grow, have made for a rocky market this month. The Dow Jones industrial average remains up 29.4% from its 12-year low hit on March 9, but is down nearly 330 points, or 3.7%, from the five-month high it reached on June 12.
Analysts say traders need to see more concrete evidence of growth before restarting the market's rally. "People are hesitant to take a position one way or the other," said Doug Roberts, chief investment strategist at Channel Capital Research.
The market is expected to remain volatile throughout the summer months, which are typically marked by light volume that can skew movements in the market.
Traders were relieved to see the announcement that the Fed will allow a program for supporting money market mutual funds to lapse by the end of October. The central bank's decision, along with reductions in the amount it will lend to banks under two others is a sign the financial system is stabilizing. The Fed is extending five other programs.
On Wednesday, the Fed said that "sustainable economic growth" should gradually resume, and inflation will "remain subdued for some time."
Government bond prices jumped after the auction for $27 billion in seven-year notes drew strong demand.
Most auctions have been attracting solid demand so far this year, but investors are looking for signs of weakness. If demand wanes, the government will have to boost yields sharply to lure buyers. Treasury yields affect consumer borrowing rates.
The yield on the benchmark 10-year Treasury note, which moves opposite its price, tumbled to 3.53% from 3.69% late Wednesday.
Lennar shares soared more than 17%, adding $1.37 to $9.19, while Toll Brothers rose 85 cents, or 5.2%, to $17.09.
Bed Bath and Beyond gained $2.69, or 9.5%, to $31.08.
Among other retail stocks, Home Depot rose 89 cents, or 3.9%, to $23.57, and J.C. Penney jumped $1.60, or 6%, to $28.20.
Investors also got good news in a slightly improved reading on gross domestic product. First-quarter GDP shrank 5.5%, the Commerce Department said, less than the previous estimate of 5.7%.
More than four stocks rose for every one that fell on the New York Stock Exchange, where volume came to 1.2 billion shares compared with 1.1 billion shares Wednesday.
Crude oil rose $1.56 to settle at $70.23 a barrel on the New York Mercantile Exchange.
The dollar was mixed against other major currencies. Gold prices rose.
In other trading, the Russell 2000 index of smaller companies rose 14.23, or 2.9%, to 509.18.
Trading volume is likely to increase into Friday ahead of the annual reconstitution of the Russell 3000 index, which includes the Russell 2000, on Friday. The change means investors who track indexes will have to buy and sell hundreds of stocks to match the new makeup of the indexes.
Overseas, Britain's FTSE 100 fell 0.6%, Germany's DAX index fell 0.7%, and France's CAC-40 lost 0.7%. Japan's Nikkei stock average rose 2.2%.