NEW YORK — Stock prices stormed upward Tuesday, erasing more than half of Monday's dramatic plunge, as investors bet that Congress would pass a revamped version of the $700-billion rescue for the sputtering financial system.
In an about-face from the dour mood that pervaded Wall Street a day earlier, financial stocks and other hard-hit sectors regained their balance after the worst sell-off in two almost two decades.
"There was a great deal of shock and disappointment at the defeat of the House bill to resuscitate the financial markets, but subsequent comments suggest that the outlook for passage of the bill is still reasonably good," said Alan Gayle, senior investment strategist at RidgeWorth Capital Management in Richmond, Va. "That gave the markets a shot in the arm."
The Dow Jones industrial average, which sank 777 points in its largest-ever point drop Monday, reclaimed 485.21 points, or 4.7%, to close at 10,850.66.
It was the Dow's third-biggest point gain in history and its best percentage advance since October 2002.
The Standard & Poor's 500 index surged 58.35 points, or 5.3% to 1,164.74. The Nasdaq composite index climbed 98.60 points, or 5%, to 2,082.33.
But the credit markets remained dysfunctional.
The three-month Libor rate, a measurement of banks' willingness to lend, rose to 4.05% from 3.88%. Between mid-June and mid-September, the rate held steady at about 2.8%.
"The bottom line is the credit markets are still profoundly broken and they'll still be that way even if we get a $700-billion package," said T.J. Marta, a fixed-income strategist at RBC Capital Markets in New York.
Libor levels are important because rates on many business loans and adjustable- rate mortgages are tied to it, meaning that consumers and small-business owners could face much higher borrowing costs unless the Libor rate retreats.
"It is very troubling," said Art Hogan, chief market strategist at Jefferies & Co. "If you're trying to borrow money for your business to make payroll and you have to pay 4% for it, it's very difficult to run a business that way."
In the stock market, major indexes closed near their highs of the day, an optimistic sign indicating that investors didn't use the rally as a fleeting opportunity to sell.
Nevertheless, the third quarter, which ended Tuesday, was ugly for shareholders.
The Dow finished the quarter down 4.4% and remains 23.4% off its record high last October.
