U.S. Stocks Bounce Back As Bargain Hunters Step In

NEW YORK (MarketWatch) -- U.S. stocks climbed Tuesday in a partial recovery from the prior session's record rout amid cautious optimism that a rescue plan rejected by the U.S. House of Representatives would be revived.

"The drama continues. There are still high expectations for a successful resolution on the legislative side, but it does point to the divide of what appears to be good for Wall Street and what appears to be good for Main Street," said Jim Dunigan, managing executive of investments at PNC Wealth Management.

The Dow Jones Industrial Average gained 234 points to 10,599.45, a level that has the blue-chip index down 8.2% from the end of August.

Of the Dow's 30 components, 25 were trading higher in the early afternoon, with blue-chip financials fronting the advance.

Citigroup Inc. gained 13.9%, J.P. Morgan Chase rose 11.8%, and Bank of America Corp. climbed 9.9%.

Of the Dow's laggards, Caterpillar Inc. fell the most, off 2.4%, followed by International Business Machines Corp. , off 1.5%, and Home Depot Inc. , declining nearly 1%.

The S&P 500 climbed 33.16 points to 1,139.55, with the broad-market index off 11.2% for the not-yet-compete month.

Financials led gains that stretched across all 10 of the index's industry groups.

Standouts in the battered financial sector included Washington Mutual Inc., recently up 94.5%, and Sovereign Bancorp Inc. , ahead 71.3%.

The Nasdaq Composite rose 60.41 points to 2,044.14, down 13.7% from its end-of-August level.

Volume on the New York Stock Exchange topped 539 million, with advancing stocks passing declining issues 2 to 1. On the Nasdaq, 392 million shares traded, with advancers bypassing decliners 5 to 4.

Given Monday's massive declines, it stands to reason that bargain hunters would step in. "With the washout yesterday, it wouldn't surprise me that the market will be up for the day," said Dunigan.

U.S. stocks plunged Monday -- the single-worst point drop ever for the Dow Jones Industrial Average -- after the House voted down the Troubled Assets Relief Package.

At Monday's finish, the Dow was down 10.2% for the nearly finished month, which proved to be a watershed one for the nation's financial system.

"It's easier to debate that you're against bailing people out, pointing fingers at CEOs and Wall Street fat cats, but when a company has difficulty buying, and growth prospects are at risk, it gets personal: job losses and a slowing economy. There is a downside to this after the pontificating," said Dunigan.

The events of September included the nationalization of the country's largest financial institutions, Fannie Mae and Freddie Mac , and the Chapter 11 bankruptcy filing of Lehman Brothers Holdings Inc. , the fourth biggest U.S. investment bank.

Later on, one-time Dow component American International Group Inc. was compelled to hand over the bulk of its stock to the government for an $85 billion loan, and Washington Mutual Inc. collapsed, marking the largest bank failure in U.S. history.

Meantime, the Treasury Department had to back money-market funds to prevent the stashing of cash, and Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke determined a bailout of massive proportions was needed to stem the bloodshed.

Overnight Libor, the rate banks charge to each other, jumped to 6.875% from 2.56875%.

Bush appeal

In a statement ahead of Wall Street's start, President Bush expressed disappointment at the failure of House members to pass the rescue package on Monday, calling the situation a "very critical moment for the economy." .

PNC's Dunigan said the administration's pitch to the public was less than successful.

"As you try to relate this to the average American, how do you explain how important a fully functioning commercial paper market and credit market is to the mainstream? It's sort of like yur lights, you expect them to go, but you don't think about where electricity comes from -- the movement of money and credit markets happens, and most people don't understand how it works, but if you can't borrow short-term, then you can't buy a house," said Dunigan.

In economic data, the Case-Shiller home price index released by Standard & Poor's found home prices in 20 major U.S. cities falling at a faster pace in July, bringing home values down a record 16.3% in the past year. .

And, a gauge of business activity in the Chicago region reported an expansion at a healthy pace in September.

Separately, the Conference Board reported U.S. consumer confidence climbed in September for a third consecutive month, but the level remained relatively low.

Yields on 10-year Treasury notes rose 7 basis points as investors sold bonds.

Gold futures fell to about $885 an ounce, while crude-oil futures gained to stand near $99 a barrel.

Overseas markets also were performing relatively well after Monday's bruising. The Nikkei 225 tumbled 4.1% in Tokyo, but the Hang Seng closed higher.

European shares posted modest gains, and appeared likely to end the third quarter down about 13%, with most of the losses generated in September. .

By Kate Gibson