A jittery Wall Street advanced Monday, reversing some of Friday's sharp losses as investors took a dismal new home sales report as a sign the Federal Reserve will lower rates this week.
The Dow Jones industrial average rose more than 176 points in a session that was relatively calm when compared to the turbulence of last week.
On the surface, the advance appeared surprising after the Commerce Department reported sales of new homes in December fell by 4.7 percent and that 2007 new home sales plunged by a record 26.4 percent compared to 2006. But while the report at first exacerbated the market's concern that the housing and mortgage crises are causing a recession, it also raised hopes that the Fed might cut rates again by a wide margin to stoke the weakening U.S. economy.
"Anticipation of another Fed rate cut is the main magnet in the market today," said Alfred E. Goldman, chief market strategist at A.G. Edwards & Sons Inc.
He was skeptical the gains would stick — anything the Fed decides after its two-day meeting lets out Wednesday could be met with disappointment. If the rate cut is small or nonexistent, the market will likely be unsatisfied; if the cut is wide, the market may worry the economy is worse than it thought.
"If we do rally into a Fed rate cut, we have a lose-lose situation," Goldman said.
And traders who bet on the Fed's next move were pricing in a more than 80 percent chance of a half-point cut.
"Any less than that could be a problem," said Richard Sparks, senior equities analyst at Schaeffer's Investment Research.
The Dow rose 176.72, or 1.45 percent, to 12,383.89 after falling as many as 95 points in morning trading. On Friday, the blue chip index tumbled 171 points after a two-day advance of more than 400 points.
Broader stock indicators also advanced Monday. The Standard & Poor's 500 index rose 23.36 or 1.76 percent, to 1,353.97, while the Nasdaq composite index rose 23.71, or 1.02 percent, to 2,349.91.
Government bond prices slipped as stocks rose. The 10-year Treasury note's yield, which moves opposite its price, was unchanged at 3.58 percent — and did not move in after-hours trading.
Alexander Paris, economist and market analyst for Chicago-based Barrington Research, said most investors were waiting for the Fed to announce its decision on Wednesday before making any big bets. That was one of the reason for a quiet trading day where the Dow stayed mostly in positive territory.
"It was calmer than I expected it would be, especially when you have lots of news for investors to look at," he said. "But, it's the Fed offsetting the news — and people don't want to make a big move when you don't know what they're going to do about interest rates."
However, trading for the week is expected to be volatile as Wall Street digests President Bush's final State of the Union address Monday evening and the Fed's rate announcement Wednesday. Last Tuesday, in an emergency move, the Fed lowered rates by 0.75 of a percentage point.
Hopes for another large cut on Wednesday had been tempered late last week by news that French bank Societe Generale sold European index futures to close positions taken by an alleged rogue trader. It is thought those trades may have aggravated the massive losses in Europe and Asian trading last Monday, when the U.S. markets were closed.
Profit reports Monday were ostensibly upbeat, but revealed some troubling signals about the economy. Fast food seller McDonald's, a Dow component, said its quarterly profit rose 3 percent due to tax benefits and strong sales, but December U.S. sales were flat with a year ago as cash-strapped consumers pared back spending. McDonald's shares fell $3.03, or 5.6 percent, to $51.07.
Merger and acquisition news added to the market's uncertainty. Blackstone Group LP on Monday said it is still interested in buying Alliance Data Systems Corp., but that the $6.4 billion deal is in jeopardy because regulators want to place onerous terms on the takeover. ADS dropped $23.12, or 35 percent, to $42.48. Blackstone slipped 21 cents to $19.15.
The dollar fell against most major currencies except the yen, and gold prices rose.
Crude oil rose 28 cents to settle at $90.99 a barrel on the New York Mercantile Exchange.
Advancing issues outnumbered decliners by nearly 3 to 1 on the New York Stock Exchange, where consolidated volume came to 3.96 billion shares, compared to 4.78 billion on Friday.
The Russell 2000 index of smaller companies rose 13.79, or 2.00 percent, to 702.39.
Asian trading saw steep losses as investors reacted to Friday's U.S. trading. In Tokyo, the Nikkei stock average dropped 4 percent and a key index in Shanghai plunged 7.2 percent. In late trading in Europe, London's FTSE 100 fell 1.36 percent, Frankfurt's DAX rose 0.03 percent and Paris's CAC 40 lost 0.61 percent.