Stocks Lurch Higher in Powerful Comeback

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The Dow rallied Wednesday, reversing a 110-point slide, as traders grew more optimistic about the prospects of a budget deal in Washington and responded to a report saying the Federal Reserve may extend its bond-buying operations.

Today's Markets

The Dow Jones Industrial Average climbed 107 points, or 0.83%, to 12985, the S&P 500 gained 11 points, or 0.79%, to 1410 and the Nasdaq Composite rose 24 points, or 0.81%, to 2992.

Every S&P 500 sector ended the day in the green. The best-performing sector was consumer discretionary, followed by energy and industrials. Meanwhile, utilities, materials and telecommunications shares performed the worst.

All Eyes on Washington 

When Wall Street focuses on Washington, volatility often ensues. Such has been the case over the past several weeks. Markets got a boost last week on apparent progress in talks to avert the fiscal cliff -- spending cuts and tax hikes due at the the beginning of next year. This week, they have fluctuated amid mixed messages from Capitol Hill. Tuesday, top lawmakers in the Senate on both sides of the aisle pointed to limited progress and resorted to criticizing the other party.

However, the markets turned around Wednesday after Speaker of the House of Representatives John Boehner said he is "optimistic that we can continue to work together to avert this crisis and sooner rather than later." Boehner has been a key player in previous debt talks, and is likely to have to steer the Republican-controlled House toward any deal.

Market participants also cited a report by the Wall Street Journal that the Federal Reserve plans on continuing its purchases of mortgage-backed securities and Treasury bonds next year as reason for the upward momentum.

Economists and political analysts broadly expect a deal to get done because the economic consequences would be so severe. However, the uncertainty over the shape and timing of a deal has in the past roiled financial markets, led ratings companies to threaten America's credit rating and weighed on consumer confidence.

"With just over four weeks to go, the mixed signals out of Washington yesterday are further reminders that talk alone (happy or otherwise) is insufficient in dealing with the fiscal cliff," analysts at Nomura wrote in a note to clients.

On the economic front, the Commerce Department said sales of new single-family homes fell 0.3% in October from September to a 368,000-unit annualized rate. Economists were expecting a rate of 390,000. September’s reading was also sharply revised lower by 20,000 to 369,000.

The closely-followed S&P/Case-Shiller report released Tuesday showed home prices in 20 major metropolitan markets having increased in September. In general, data have pointed to continued recovery for the embattled housing market. However, economists are quick to point out that the rebound has come from very depressed levels.

The Federal Reserve also said its anecdotal Beige Book that the U.S. economy expanded at a ‘measured pace’ in recent weeks. The report said most districts experienced “modest improvements” in hiring activity, while consumer spending grew at a “moderate pace” and manufacturing weakened. Some districts also reported weakness as a result of Hurricane Sandy, the central bank said.

Oil futures slumped for the third day in a row. The benchmark crude contract slipped 69 cents, or 0.79%, to $86.49 a barrel. Wholesale New York Harbor gasoline rose 0.07% to $2.734 a gallon.

In metals, gold fell $26.00, or 1.5%, to $1,719 a troy ounce.

Foreign Markets

The Euro Stoxx 50 gained 0.13% to 2547, the English FTSE 100 climbed 0.06% to 5803 and the German DAX rose 0.15% to 7343.

In Asia, the Japanese Nikkei 225 sold off by 1.2% to 9308 and the Chinese Hang Seng dropped 0.62% to 21709.