While the beginning of the new quarter was an incentive for institutional investors to buy, the market was also encouraged that the worst might be over from the summer's credit and stock market turmoil. And new economic data might nudge the Federal Reserve toward another interest rate cut at its Oct. 30-31 meeting.
Investors bought financial shares on the belief that the industry has generally weathered the recent credit market upheaval. Both Citigroup and Switzerland's UBS AG issued third-quarter profit warnings, but indicated the current period might see a return to normal earnings levels.
The market grew more optimistic that the Fed might lower rates to boost the economy after a report showed that manufacturing grew in September at the slowest pace in six months. The Institute for Supply Management said its index of manufacturing activity registered at 52.0 in September, below forecasts for a reading of at least 52.5.
"People are getting more confident there is going to be an October rate cut," said John C. Forelli, portfolio manager for Independence Investment. "To some degree, it looks like Citi kitchen-sinked the quarter, and that from here going forward will be calmer. That's underpinning the financials."
Enthusiasm about acquisition activity picked up after Nokia unveiled an $8.1 billion (euro5.69 billion) offer to buy navigation-software maker Navteq Corp. The deal was seen as a signal that corporations are feeling comfortable in making big moves despite recent market turbulence.
The Dow rose 191.92, or 1.38 percent, to 14,087.55.
The Dow surpassed its closing record of 14,000.41 set in mid-July, and moved into record territory, rising as high as 14,115.51 and eclipsing its previous intraday high of 14,021.95 set July 17.
Broader market indexes also rose sharply. The Standard & Poor's 500 index rose 20.29, or 1.33 percent, to 1,547.04, nearing its all-time trading high of 1,555.90, also reached in mid-July. The Nasdaq composite index rose 39.49, or 1.46 percent, to 2,740.99; the tech-laden index remains well below its high of 5,048.62, reached in 2000 when it was bloated by the dot-com boom.
The Dow finished a turbulent third quarter with a 3.6 percent gain, after the Fed eased investor concerns over the credit and housing markets by lowering key interest rates half a percentage point.
Bonds moved higher Monday, with the yield on the benchmark 10-year Treasury note falling to 4.55 percent from 4.59 percent late Friday. Fixed-income investors, currently concerned about the dollar's recent weakness, interpreted the ISM report as not necessarily portending an interest rate cut, which would further erode the U.S. currency.
The dollar was mixed Monday against other major currencies, while gold prices rose.
Arthur Hogan, chief market analyst at Jefferies & Co., said the biggest tipping point of the day was financial stocks. For the first time, Citi considered a barometer for the banking industry
is giving some real number about the extent of its damage, he said.
"If they are giving us worst-case scenario, then market participants are feeling that most of the stuff we've worried about since July will remain contained," he said. "That's the celebration the market is putting on right now, and the take away is that the black hole of not knowing finally has some numbers around it."
Financial stocks from brokerages to retail banks slumped during the third quarter as uncertainty grew about the extent of losses from the credit and subprime mortgage turmoil. Comments from Citi Chief Executive Charles Prince that he expects to "return to a more normal earnings environment" during the fourth quarter put investors more at ease.
And, since analysts believe financials must lead a broader Wall Street advance, a rally in bank and brokerage stocks was greeted with enthusiasm. Citigroup shares rose $1.05, or 2.3 percent, to $47.72. Countrywide Financial Corp., the nation's largest home loan provider, rose 95 cents, or 5 percent, to $19.96 on the potential of an easing in subprime loan jitters.
UBS, the largest Swiss bank, rose $1.69, or 3.2 percent, to $54.94 after warning it would take a pretax loss of up to $690 million in the quarter and cut 1,500 jobs. Rival Credit Suisse Group rose $1.66, or 2.5 percent, to $67.99 after it said third-quarter profit will remain healthy despite stormy conditions.
Homebuilding stocks another group that has been hard hit in recent weeks spiked after several big players in the sector were upgraded by Citigroup. The report said large-cap builders with stronger balance sheets should benefit in the coming quarters.
Lennar Corp. rose 62 cents, or 2.7 percent, to $23.27; D.R. Horton Inc. added 65 cents, or 5.1 percent, to $13.46; and Pulte Homes Inc. was up $1.18, or 8.7 percent, at $14.79.
Hope that acquisition activity would rebound from a sluggish third quarter got a boost when Nokia said it would buy Navteq. The deal is the first announced during the fourth quarter. During the third quarter, there was $992.1 billion worth of deals during the third quarter down 43 percent from the second quarter, according to data tracker Dealogic.
Nokia rose 8 cents to $37.96, while Navteq fell $1.52, or 2 percent, to $76.45. The stocks of acquiring companies tend to fall after takeover announcements amid concerns that a deal might burden the purchaser with debt.
The Russell 2000 index of smaller companies was up 19.29, or 2.39 percent, at 824.74.
Advancing issues led decliners by a 3 to 1 basis on the New York Stock Exchange, where volume hit 1.18 billion shares, up from 1.03 billion shares on Friday.