The stock market began August with a huge rally after economic and earnings reports from around the world revived investors' faith in the global recovery.
The Dow Jones industrial average jumped nearly 190 points in afternoon trading. Major stock indexes all rose more than 1.5 percent.
The market rallied at the opening bell on upbeat economic news from China and earnings reports from European banks. Then, shortly after trading began, investors got a surprisingly good report on U.S. manufacturing. The Institute for Supply Management said its manufacturing index slipped to 55.5 in July from June's 56.2. Although the results showed a modest slowdown in growth, traders were pleased because they were higher than the 54.1 forecast by economists polled by Thomson Reuters. And any reading above 50 indicates expansion.
The market was encouraged by several key components of the index. Production and new orders both improved, as did companies' willingness to hire new employees.
"Every component in ISM was greater than 50," said Cort Gwon, director of trading strategies and research at FBN Securities. "To have all of them up is a good sign."
Stock trading has been erratic for months because of signs the recovery was weakening. Strong earnings in July helped drive stocks to their best month in a year, but the rally was fading at the end of the month on new worries about the economy. The ISM report is significant because it is the first major reading of the economy from July and investors are trying to determine just how strong the recovery will be in the second half of the year.
Industrial and materials stocks, including 3M Co. and General Electric Co., rose after the report.
Investors largely dismissed renewed caution from Federal Reserve chairman Ben Bernanke. During a speech Bernanke said the economy still has a long way to go to recover. Bernanke's comments before Congress a couple of weeks ago, calling the economy "unusally uncertain," led to a sell-off in stocks.
In afternoon trading, the Dow Jones industrial average rose 189.52, or 1.8 percent, to 10,655.61. The Standard & Poor's 500 index rose 21.76, or 2 percent, to 1,123.36, while the Nasdaq composite index rose 36.54, or 1.6 percent, to 2,291.24.
About five stocks rose for every one that fell on the New York Stock Exchange where volume came to 526.3 million shares.
Whether investors can hold on to their optimism will turn on the government's July employment report, which is being released on Friday. Volume was also light Monday as many investors, following the strategy they used during July, decided to stay out of the market until they feel more confident that its gains will hold.
"The public is more cautious," said Bruce McCain, chief investment strategist at Key Private Bank. "It's more of a wait and see mode."
McCain said it would take a string of economic reports that consistently beat expectations to bring more investors back into the market. That makes this week especially important with plenty of reports, including Friday's jobs data and ISM's service sector report, due out later this week.
With stocks rising sharply, bond prices fell. The yield on the 10-year Treasury note, which moves opposite its price, rose to 2.95 percent from 2.91 percent late Friday. Its yield is often used as a benchmark to set interest rates on mortgages and other consumer loans.
Britain's FTSE 100 gained 2.7 percent, Germany's DAX index rose 2.3 percent, and France's CAC-40 rose 3 percent. Japan's Nikkei stock average rose 0.4 percent and Hong Kong's Hang Seng jumped 1.8 percent.
Monday began with news out of China, where manufacturing data showed that the company's industrial growth was moderate enough that government isn't likely to take steps to slow the country's economy. Investors have periodically sold stocks on concerns that China's economy would slow and pull other economies down with it.
Meanwhile, a manufacturing report for the 16 countries that use the euro was revised higher for July and showed that the continent's economy continues to recover faster than expected. The stock market's spring plunge was triggered by concerns that rising government debt in Europe would stagnate the region's economy and in turn affect other countries including the U.S.
Stocks also rose on strong earnings reports from banking giants HSBC and BNP Paribas, which reassured investors that the continent's financial sector is not being hurt by the debt problems.
HSBC shares trading in the U.S. rose $2.64, or 5.2 percent, to $53.72.
Among U.S. stocks, 3M rose $1.90, or 2.2 percent, to $87.44, while GE rose 28 cents to $16.40.
Oil prices jumped on signs of manufacturing growth. That, in turn, drove stocks of energy companies higher. ExxonMobil Corp. rose $1.96, or 3.3 percent, to $61.64, while Chevron Corp. jumped $1.66, or 2.2 percent, to $77.87. Benchmark crude rose $2.46, or 3.1 percent, to $81.41 a barrel on the New York Mercantile Exchange.
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