Wall Street rose on Monday, lifted by stronger-than-expected expansion in U.S. manufacturing last month, although the major U.S. stock indexes slipped off session highs after the Federal Reserve chairman's remarks.
The indexes trimmed earlier gains and the Nasdaq briefly turned negative as Fed Chairman Ben Bernanke defended the U.S. central bank and its ultra-loose monetary policy as it aims to reduce unemployment.
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But the market's gain on the first day of the final quarter of 2012 comes after stocks closed a strong third quarter, helped by stimulative measures from the Federal Reserve and the European Central Bank. The S&P 500 finished the quarter up 5.8 percent, its best third quarter since 2010.
"The fact that the market is not as strong as before in terms of holding up gains, especially on a day like today when the ISM was a pretty good beat, shows that the market is tired and that the positive tone has changed," said James Dailey, portfolio manager at TEAM Asset Strategy Fund in Harrisburg, Pennsylvania.
"I see this as suggesting that we are likely in for a deep correction. We are at a point where even the good news is not good enough."
The Dow Jones industrial average <.DJI> gained 123.71 points, or 0.92 percent, to 13,560.84. The Standard & Poor's 500 Index <.SPX> climbed 8.46 points, or 0.59 percent, to 1,449.13. The Nasdaq Composite Index <.IXIC> added 4.56 points, or 0.15 percent, to 3,120.79.
U.S. manufacturing expanded in September for the first time since May as new orders and employment picked up, an Institute for Supply Management report showed. The ISM data eased concerns about the economy and offset a gloomier outlook in Asia and Europe.
A number of blue-chip stocks hit 52-week highs, helping the Dow outperform the broader market. Shares of General Electric rose 0.8 percent to $22.90, after rising as high as $22.99 earlier. IBM also hit a new 52-week high at $211.75 and The Travelers Co rose as high as $69.48 earlier in the session. By mid-afternoon, IBM's stock was up 2 percent at $211.69 and Travelers' stock was up 1.4 percent at $69.24.
Financial stocks led the market's advance with Goldman Sachs Group up 3.4 percent at $117.59 after the weekly Barron's said Goldman shares could rise at least 25 percent in the next year as capital markets improve.
In a speech delivered to the Economic Club of Indiana, Bernanke said the Fed's third round of bond purchases is unlikely to stoke inflation. He added it will not "prematurely" raise policy rates, which have been near zero since December 2008.
The energy sector also gained, with an S&P index of energy stocks up 1 percent. U.S. crude oil futures for November delivery added 29 cents to $92.48 a barrel.
The ISM's index rose to 51.5 in September from 49.6 in August, topping expectations for a reading of 49.7, according to a Reuters poll. The September reading rose above the 50 mark that separates expansion from contraction. The ISM figure came after a survey from Markit showed U.S. manufacturing ended its worst quarter in three years in September as foreign demand for U.S. goods fell sharply.
The U.S. data followed surveys in the euro zone that showed manufacturing slackened in the three months to September while Asia's factories are continuing to struggle in the face of tepid demand from the United States and Europe. The data suggested the euro zone may be moving toward recession and showed a seventh straight quarter of slowing growth in China.
"The U.S. economy is growing at a slow pace, but it is still growing. The ISM number suggests that things are not that bad," said Adam Sarhan, chief executive of Sarhan Capital in New York.
The national ISM survey is especially heartening after some weak regional surveys last month. The Chicago PMI, a survey that measures business activity in the Midwest, showed its first contraction since 2009 in September.
Among stocks weighing on the Nasdaq, discount retailer Gordmans Stores Inc said it could miss analysts' profit estimates for the first time since it went public in 2010 as slowing sales forced the company to cut its current-quarter outlook. The stock slumped 22 percent to $14.39.
Baidu Inc shares fell 3.5 percent to $112.74 after Jefferies cut the stock to "hold" from "buy" and lowered the price target to $125 from $135.
Ceradyne Inc shares gained 42.9 percent to $34.92 on news the company will be acquired by 3M Co for $860 million.
(Editing by Jan Paschal)