Encouraging economic reports lifted stocks Monday and bolstered hopes that the recovery is in better shape than many had believed.
The Dow Jones industrial average rose 118 points after falling in the final two days of last week. Energy stocks led the market higher following a strong earnings report from Exxon Mobil Corp.
Gains in manufacturing and personal incomes helped shore up the market's sentiment after three straight losing weeks that left stocks with a loss for January. Investors were already becoming more optimistic thanks to news on Friday that the economy grew at the fastest pace in six years in the final three months of 2009.
"The market exhaled today," said Mike Shea, managing partner at Direct Access Partners LLC in New York. "This has been a very skittish market for the last three to four weeks."
The strongest piece of economic news came from the Institute for Supply Management, which said its index of U.S. manufacturing activity grew for a sixth straight month in January to the strongest level since August 2004. The trade group said factories increased production as customers replenished inventories.
The ISM's manufacturing index jumped to 58.4 in January from 54.9 in December, well above the 55.5 that analysts polled by Thomson Reuters had expected. Any reading above 50 signals growth.
Surveys released Monday in Europe and China showed that factories are going strong overseas too, which helped send shares of industrial companies higher.
Meanwhile the Commerce Department said consumer spending increased by 0.2 percent in December, its third straight monthly gain. The government also said personal income increased more than expected in December.
"The economy and the recovery seem to be on track," said Kevin Shacknofsky, portfolio manager of the Alpine Dynamic Dividend Fund in Purchase, N.Y.
The government reported last Friday that the U.S. economy grew at an annual rate of 5.7 percent in the final three months of 2009, a pace far stronger than economists had forecast.
The positive signals lent support to a market that fell sharply in late January, marking its worst monthly performance since major stock indexes hit 12-year lows early last year. The Dow reached a 15-month high of 10,725 on Jan. 19 and it is still down 5 percent since then. It lost 3.5 percent in January.
The Dow rose 118.20, or 1.2 percent, to 10,185.53, its biggest gain since Jan. 4. The broader Standard & Poor's 500 index rose 15.32, or 1.4 percent, to 1,089.19. The Nasdaq composite index rose 23.85, or 1.1 percent, to 2,171.20.
Bond prices fell, pushing yields higher. The yield on the benchmark 10-year Treasury note rose to 3.66 percent from 3.60 percent late Friday.
The dollar mostly fell against other major currencies, while gold rose.
President Barack Obama sent Congress a $3.83 trillion budget that would pour more money into the fight unemployment — which is still high at 10 percent — and boost taxes on the wealthy.
Kent Engelke, chief economic strategist at Capitol Securities Management in Glen Allen, Va., said an improvement in the ISM's employment measure bodes well for the government's January employment report, which is due Friday and is the most important economic report on the calendar.
Engelke predicts that the jobs report could come in better than expected. While that would be good for the economy, an especially strong reading on the job market might also prompt concerns about when the Federal Reserve will have to start raising interest rates from their historic lows.
That could trip up the stock market as well as bonds, which have benefited greatly from the near-zero short term lending rates and other steps the Fed has taken to shore up U.S. banks and the debt markets.
"What are we going to do? The Fed is going to take away our high-octane fuel," Engelke said. "We're no longer going to have sugar being injected into our veins."
Investors also looked to earnings at Exxon Mobil, which topped expectations and helped pull energy stocks higher. The company's shares rose $1.75, or 2.7 percent, to $66.18.
The technology-heavy Nasdaq lagged the broader market as Amazon.com fell $6.54, or 5.2 percent, to $118.87. The online retailer agreed to sell e-books at higher prices after getting pressure from publisher Macmillan.
Crude oil rose $1.54 to $74.43 per barrel on the New York Mercantile Exchange.
More than three stocks rose for every one that fell on the New York Stock Exchange, where volume came to 1 billion shares compared with 1.6 billion traded Friday.
The Russell 2000 index of smaller companies rose 7.21, or 1.2 percent, to 609.25.
Britain's FTSE 100 rose 1.1 percent, Germany's DAX index rose 0.8 percent, and France's CAC-40 rose 0.6 percent. Earlier, Japan's Nikkei stock average rose 0.1 percent.