Retreating oil prices and signs of strength in the U.S. economy's service sector sparked Wall Street's biggest rally in almost two months Tuesday, sharply boosting indexes as investors returned from the holiday weekend in a buying mood.
The Dow Jones industrial average soared 141 points, notching its biggest one-day gain since July 8, after some Gulf Coast refineries came back on line and oil futures tumbled $1.61 a barrel to $65.96, below where they were when Hurricane Katrina walloped the New Orleans area Aug. 29.
The pullback in the price of oil came on the heels of Friday's decline of $1.90 a barrel, giving investors hope that energy sector disruptions might not be as severe or as long-lasting as some at first had feared.
"The weekend was filled with horrible news headlines coming out of Katrina," said Dick Green, president of investment website Briefing.com, referring to reports that the death toll may be in the thousands and that losses could exceed $100 billion.
"But the stock market is looking past this tragedy," Green said. "There's going to be a lot of government spending on reconstruction, and if you get the Federal Reserve holding off on interest rate hikes and you also get declining oil prices, those are all going to be huge positives for the economy."
In active trading, the Dow index jumped 141.87 points, or 1.4%, to 10,589.24, as 28 of its 30 component stocks rose. The broader Standard & Poor's 500 index surged 15.37 points, or 1.3%, to 1,233.39, and the technology-heavy Nasdaq composite climbed 25.79 points, or 1.2%, to 2,166.86.
The upswing left all three indexes at their highest closings since Aug. 15. U.S. markets were closed Monday for Labor Day.
After withstanding the chaotic aftermath of Katrina and posting gains for the week ended Friday, the indexes closed Tuesday near their highs for the session, noted Jack Caffrey, equity strategist at JPMorgan Chase & Co.'s private bank.
"People wanted to be involved, and they weren't taking profits," Caffrey said. "You've got investors looking at last year's playbook, when most of the market's gains came in the fourth quarter, and wondering if we're not headed for a repeat. They don't want to get left behind."
On the economic front, data from a survey of purchasing managers showed the nation's service sector was in strong shape before the hurricane.
The Institute for Supply Management said its services index rose to 65 in August from 60.5 in July, surprising economists with the best reading since April 2004.
"It reminded people of the strength of the economy before Katrina," Green said. "Yes, that's important, because although there will be damage from the disaster, when you're coming off a stronger base and you have momentum, you take less of a hit."
In the Treasury market, yields shot up as traders shifted assets from fixed-income securities into stocks. The yield on the benchmark 10-year T-note rose to 4.09% from 4.03%. Yields on bonds rise as their prices fall.
Although some strategists still expect the Fed to hike interest rates at its next meeting, on Sept. 20, a growing contingent believes the central bank could pause from its credit-tightening campaign -- either this month or later in the year -- to assess Katrina's economic toll.
The Fed, which also meets in November and December, has lifted its key short-term lending rate to 3.5% from 1% since summer 2004 through a series of 10 quarter-point hikes. A halt in the hikes could help hurricane recovery and reconstruction efforts by keeping a lid on borrowing costs for individuals and businesses.
Clues to the Fed's next move could come with today's release of its "beige book" update on the economy, market pros said.
In foreign markets, key indexes rose 1.2% in Germany, 1% in France and 1.2% in Brazil.
Among U.S. stocks on the move:
* Brokerage analyst upgrades boosted Deutsche Bank, which gained $5.87 to $95.27; Colgate-Palmolive, which rose $1.02 to $53.51; Cisco Systems, which gained 48 cents to $18.20; PennySaver publisher Harte-Hanks, which added $1.63 to $27.25; and electronic device maker Palm, which advanced $2.22 to $34.59.
* Construction and housing stocks expected to benefit from rebuilding efforts rallied, including home builder D.R. Horton, which gained $1.54 to $38.28; highway builder Meadow Valley, which added $2.45 to $11.95; and Lamson & Sessions, a maker of electrical equipment for utilities, which climbed $2.20 to $15.73.
* Apple Computer rose $2.58 to $48.80 on speculation the iPod maker and Motorola would today unveil a cellphone with music software. Motorola increased 41 cents to $22.41.
* Protein Design Labs climbed $2.99 to $29.92 after the biotech company said its heart failure treatment was successful in Phase II trials.
* Halliburton rose $2.51 to $64.82 after winning a contract, valued at more than $2 billion, to help build Yemen's first plant for exporting liquefied natural gas.
* Electronic Arts fell $1.28 to $56.14 after saying its game studio chief was being replaced.
* Supervalu slipped $3.17 to $31.77 after the supermarket company lowered its 2006 profit outlook.
* Chemical maker W.R. Grace slumped 90 cents to $10.82 on reports that a proposed $140-billion federal fund to pay asbestos victims could be delayed.