Last Updated at 4:10 p.m. EDT
Some better-than-expected retail earnings reports and the latest reading on housing are drawing investors back into the stock market.
Stocks rebounded Tuesday from the previous day's selloff, with major indicators rising about 1 percent, led by a surge in financial and technology companies. Investors were still wary about consumer spending and the economy as a whole, but found enough good news in retailers' reports and the Commerce Department's latest take on the housing market to justify the comeback.
Analysts said investors were putting things in perspective, believing that Monday's big drop, in which the Dow Jones industrials tumbled 186 points, was a bit overdone. The U.S. market was also taking some cues from overseas exchanges, which got a boost from encouraging news about the German economy. And bond prices retreated as investors' anxiety about the economy eased.
"The outlook for the economy doesn't change every 24 hours," said Alan Skrainka, chief market strategist at Edward Jones. "The news is always mixed even after you've hit bottom."
Investors have been battling mixed signals on the economy for several weeks; housing and manufacturing have been improving, but consumer spending is still sagging. On Monday, stocks fell by the biggest amount in six weeks as investors' growing fears that consumers won't spend enough to lift the economy into recovery caught up with them.
The earnings reports from retailers on Tuesday showed that American consumers are still shy about spending, but results weren't quite as bad as analysts expected and that helped calm some of investors' nerves.
Meanwhile, the Commerce Department reported that construction of new homes and apartments fell more than expected last month, but construction of single-family homes actually rose 1 percent to the highest level since October 2008. It was the fifth straight monthly increase.
Analysts have warned that the market has gotten ahead of itself and that some pullback is inevitable, given the more than 40 percent climb in stocks since March and the challenges that still exist in high unemployment and waning consumer confidence. But the market continues to show resilience, with any retreat in stocks being brief.
In other trading, the Russell 2000 index of smaller companies rose 9.04, or 1.7 percent, to 557.22.
About four stocks rose for every one that fell on the New York Stock Exchange, where volume came to a light 652.8 million shares.
Overseas markets also rebounded from steep declines on Tuesday. Japan's Nikkei stock average rose 0.2 percent, a day after Japanese economists and politicians unnerved investors with their cautious stance on the economy, despite a government report showing Japan had emerged from a yearlong recession in the second quarter.
Major European indexes rose after a research institute reported that consumer confidence is rising in Germany, Europe's largest economy. Britain's FTSE 100, Germany's DAX index and France's CAC-40 all added 0.9 percent.
Meanwhile, bond prices dipped after the previous day's big gains, which were a response to investors' nervousness about the economy. The yield on the benchmark 10-year Treasury note, which moves in the opposite direction from its price, rose to 3.53 percent from 3.47 percent late Monday.
John Wilson, chief technical strategist at Morgan Keegan, said he's encouraged that investors keep seeing opportunities in the market's dips.
"Buying tends to come in a little quicker because people have missed the market," he said, referring to the recent surge in stocks that has taken the S&P 500 index up 12 percent in a little over a month and 45.5 percent since early March.
"The data is not going to all of a sudden turn positive," he said. However, "more and more people are beginning to embrace the fact that we're through the worst of the recession."
The big question, though, is how strong the economy's recovery will be, given consumers worries about their jobs and their hesitance to spend.
"There's volatility because investors have a lot of questions," Skrainka said. "What will the recovery look like and how much of this is already reflected in stock prices?"
Investors once again bought stocks that are dependent on a healthy economy, including financial, industrial and technology companies. Gains in industries that tend to hold up better when the economy is weak, like health care and utilities, were more subdued.
Among technology stocks, Apple Inc. rose $4.51, or 2.8 percent, to $164.10.
Bank of America added 41 cents, or 2.5 percent, to $16.97, while JPMorgan rose $1.06, or 2.6 percent, to $41.79.
In earnings news Tuesday, Home Depot Inc. said its second-quarter profit , but its adjusted results beat Wall Street's expectations, as cost cuts partly offset weak revenue. The world's largest home improvement retailer also lifted its forecast for full-year earnings.
Target Corp.'s quarterly profit also fell but it surpassed analyst estimates. And TJX Cos. said its second-quarter profit rose 31 percent as its discount-oriented stores continued to lure in cost-conscious shoppers. Not all the reports were positive, though. Luxury department store Saks Inc. said its loss widened from a year earlier.
Home Depot shares added 76 cents, or 2.9 percent, to $26.87. TJX shares lost 68 cents to $34.70, while Target jumped $3.11, or 7.6 percent, to $44.32.
The dollar lost ground against other major currencies, while gold prices rose.
Oil prices were higher after dropping to a new monthly low on Monday. Light, sweet crude jumped $2.53 to $69.28 a barrel on the New York Mercantile Exchange.