Stocks saw a solid early start on news of a possible alliance between General Motors Corp. and Nissan Motor Co., although Dow Jones industrial GM slumped ahead of its June sales results. Meanwhile, takeover speculation at Alcoa Inc. left the aluminum maker among the Dow's biggest gainers.
A slowdown in monthly manufacturing activity and construction spending was unexpected but nonetheless reinforced views that a moderating economy would keep the Federal Reserve from raising interest rates much further, as did a drop in prices paid by producers.
But with many traders out of the office ahead of Independence Day, analysts said the light trading volume likely exaggerated stocks' gains. The stock markets closed at 1 p.m. Eastern time and will be closed on Tuesday.
"There may be some follow-through reaction on Wednesday" to the economic reports, said Russ Koesterich, senior portfolio manager at Barclays Global Investments. However, "with this type of volume, you can't read much into the market's reactions."
At the close, the Dow rose 77.80, or 0.7 percent, to 11,228.02. On Friday, the Dow fell 40 points as money managers locked in profits from its 217-point rally Thursday.
Broader stock indicators also advanced. The Standard & Poor's 500 index gained 9.99, or 0.79 percent, to 1,280.19, and the Nasdaq composite index surged 18.34, or 0.84 percent, to 2,190.43.
Bonds were down, although they recouped some of their earlier losses, with the yield on the 10-year Treasury note edging up to 5.15 percent from 5.14 percent late Friday. The U.S. dollar gained on the Japanese yen; gold prices lingered near $615 per ounce.
Although Monday's economic news helped support views that interest rates may have been hiked enough to slow the economy and contain inflation, the Labor Department's report on employment and wages Friday is more likely to be market-moving, analysts said.
"If all we do is look at this data as it pertains to the Fed, this is good news," said Art Hogan, chief market analyst for Jefferies & Co. "But prices paid and construction spending are not the most important pieces of data right now. Nonfarm payrolls on Friday will be what attracts attention."
The Institute for Supply Management's June manufacturing index fell 0.6 points to 53.8, while economists were forecasting a rise to 55. Although the prices paid index slid 0.5 points to 76.5, that came in ahead of forecasts for 75.
Elsewhere, the Commerce Department said a sharp dip in homebuilding drove a 0.4 percent decline in May construction spending. Economists had been anticipating a 0.2 percent increase.
Crude futures stood near $74 amid concerns about heightened gasoline demand during the busy summer driving season. A barrel of light crude fell 8 cents to settle at $73.85 late Sunday on the New York Mercantile Exchange, where trading was closed Monday and Tuesday.
Nissan said it would begin talks of GM joining an existing partnership between the Japanese automaker and Renault SA. Reports have said Nissan and Renault could buy as much as 20 percent of GM's stock. GM nonetheless lost 38 cents to $29.41 while Nissan added 21 cents to $22.19.
Nortel Networks Corp. surged after Jefferies & Co. upgraded the telecom equipment company, citing a low share price and changes being implemented following an accounting scandal two years ago. Nortel rose 7 cents to $2.31.
JPMorgan said Alcoa could become a takeover target of Australian resource companies BHP Billiton Ltd. and Rio Tinto Ltd. Alcoa gained 73 cents to $33.09.
Fellow Dow component Wal-Mart Stores Inc. sagged after forecasting its June sales at the low end of estimates for growth of 1 percent to 3 percent, citing the impact of high gasoline prices. Wal-Mart sank 60 cents to $47.57.
Overseas, Japan's Nikkei stock average climbed 0.43 percent in its third straight day of gains. Britain's FTSE 100 rose 0.87 percent, Germany's DAX index added 0.52 percent and France's CAC-40 was higher by 0.3 percent.
Advancing issues led decliners by 3 to 1 on the New York Stock Exchange, where 769.2 million shares changed hands.
The Russell 2000 index of smaller companies climbed 6.13, or 0.85 percent, to 730.80.