Late surge gives stocks largest advance in two years

U.S. stocks on Tuesday rallied the most in more than two years as the Federal Reserve said it was prepared to use a range of tools to bolster the economy following Monday's rout in equities.

The Standard & Poor’s 500 Index gained as much as 2.9 percent in midday trading, then dropped 1.6 percent following the Fed’s statement before resuming its advance. Financial stocks, which paced a slide that erased $1 trillion in market value yesterday, soared more than 8 percent.

The S&P 500 climbed 4.7 percent to 1,172.55 at 4 p.m. in New York, the biggest advance since March 2009. The benchmark gauge for American equities dropped 6.7 percent Monday and traded at 12.3 times reported earnings, the lowest valuation since March 2009. The Dow Jones Industrial Average rose 429.62 points, or 4 percent, to 11,239.47 Tuesday.

“We’ve gone too far, too fast,” Bruce McCain, who helps oversee $22 billion as chief investment strategist at the private-banking unit of KeyCorp in Cleveland, said. “We may have a bit of a back and forth as the buyers and sellers temporarily gain the upper hand. Still, we’re at a point where the market is trying to put a bottom in place. The Fed is clearly setting a situation that could offer them the potential to do something significant, if necessary.”

The Fed pledged for the first time to keep its benchmark interest rate at a record low at least through mid-2013 in a bid to revive the flagging recovery after a worldwide stock rout. The Federal Open Market Committee discussed a range of policy tools to bolster the economy and said it is “prepared to employ these tools as appropriate,” it said in a statement Tuesday in Washington. Three members of the FOMC dissented, preferring to maintain the pledge to keep rates low for an “extended period.”

Benchmark indexes had their biggest slump since December 2008 Monday amid concern that a reduction of the U.S. credit rating by S&P may worsen an economic slowdown. The S&P 500 slumped 11 percent in three days, the most since November 2008, and fell to the lowest since September. The index dropped 18 percent from this year’s high on April 29 through Monday.

Financial and raw-material companies, which paced the declines in the S&P 500 Monday, were among the best performers Tuesday, rising at least 5.9 percent. Companies which are least-tied to the economy, including consumer staples providers and utilities, gained the least Tuesday.

General Electric Co. and Johnson & Johnson are among 20 stocks investors should buy for their dividend yields after equities plunged and Treasuries surged in the past two weeks, JPMorgan Chase & Co. said.

The 17-percent drop in the Standard & Poor’s 500 Index from July 22 through Monday has spurred investor concern of a recession, according to Thomas J. Lee, the bank’s New York-based chief U.S. equity strategist. While the likelihood that the U.S. economy will contract is low, investors should buy stocks with dividend yields that are higher than the 10-year Treasury yield and have strong earnings growth until equity markets recover, Lee wrote in a note to clients Tuesday.