Investors who were heartened by an earlier report of slowing producer prices began buying in earnest after Federal Reserve Bank of St. Louis President William Poole described the Fed's interest rate policy as "about right." Poole, who currently sits on the Fed's policy-making Open Market Committee, had reassuring words for a market that has been counting on a steady rate policy for the near future.
Earlier, the Labor Department said inflation at the wholesale level as measured by the Producer Price Index dropped by 1.6 percent last month following a 1.3 percent slide in September. Plunging energy prices were behind the declines, which gave Wall Street some relief from concerns that rising inflation might prompt the Fed to raise rates after three straight meetings where they were left unchanged.
"With the PPI down and with the Fed cautiously optimistic about the economy, not signaling any rate hikes, it confirmed what the market was hoping to hear," said Jay Suskind, head trader at Ryan Beck & Co.
The Dow rose 86.13, or 0.71 percent, to close at 12,218.01, above the previous record close of 12,176.54 reached last Wednesday. The blue chips also reached a trading high of 12,228.01.
Broader stock indicators also closed sharply higher. The Standard & Poor's 500 index rose 8.80, or 0.64 percent, to 1,393.22. It hit a trading high of 1,394.49; this is the first time the S&P 500 has surpassed 1,394 since November 2000.
The Nasdaq composite index rose 24.28, or 1.01 percent, to 2,430.66.
Bonds rose on the inflation news, with the yield on the benchmark 10-year Treasury note falling to 4.57 percent from 4.59 percent late Monday. The dollar rose against other major currencies, while gold prices slipped.
Light sweet crude oil prices slipped 30 cents to settle at $58.28 a barrel on the New York Mercantile Exchange.
Before Poole's comments, investors sifted through economic reports, which also included a second straight monthly drop in retail sales during October. The 0.2 percent decline reported by the Commerce Department report reflected the 25 percent drop in crude oil prices since mid-July rather than a weakness in consumer spending. The drop in sales was also smaller than expected.
The market was initially unnerved by a disappointing earnings report at Home Depot Inc., which raised concerns about the toll that slowing home sales is taking on other industries. Home Depot posted a 3.1 percent third-quarter profit drop on a sharp decline in same-store sales, those from stores open at least a year.
But stocks later turned higher, and Home Depot shares rebounded $1.56, or 4.3 percent, to close at $37.96.
"There's a sense that the housing market has bottomed," Suskind said.
Meanwhile, Wal-Mart Stores Inc. rose $1.34, or 2.9 percent, to $47.66, after reporting third-quarter earnings rose 11.5 percent despite weak growth in U.S. sales. The world's largest discount retailer promised its most aggressive holiday discounts ever to boost year-end business.
Discounter Target Corp. rose $1.40, or 2.4 percent, to $59.16, after it beat analysts' projections with an 11 percent rise in sales.
The strength in discount retailers' profits "throws some cold water on the argument that the housing market will affect consumer spending," said Jim Russell, director of core equity strategy for Fifth-Third Asset Management in Cincinnati.
D.R. Horton Inc. climbed $2.12, or 9.5 percent, to $24.50 after the homebuilder's third-quarter results surpassed analysts' expectations.
Intel Corp.'s early rollout of its new quad-core processors helped boost the technology sector Tuesday. Intel, the world's largest maker of computer chips, rose 88 cents, or 4.2 percent, to $21.88.
The performance of the stock market going forward will depend largely on whether the economic data released later this week — including the Consumer Price Index, housing starts and industrial production — come in strong or weak.
But Russell said that aside from a very high CPI number, "I can't point to anything in the economic data that would really derail the market in any kind of meaningful way at this point."
The Russell 2000 index of smaller companies rose 12.65, or 1.64 percent, to 785.06 — a new record high.
Advancing issues widely outnumbered decliners on the New York Stock Exchange, where volume was 1.7 billion shares.