Dow up 156 ahead of Wednesday's expected hike
Stocks jumped Tuesday with the Dow gaining 157 points as the price of crude oil rallied for a second day and Wall Street awaits the Federal Reserve's decision Wednesday on interest rate hikes.
Investors also kept an eye on the ongoing turmoil in the riskier corner of the corporate bond market.
The Dow Jones industrial average finished up 0.9%, while the S&P 500 gained 1.1% and the Nasdaq composite climbed 0.9%.
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Recently stocks had been hurt by a continuing plunge in U.S.-produced crude oil, which earlier Monday tumbled below $35 a barrel for the first time since the 2008 financial crisis.
The swoon in oil prices has also spooked bond investors that hold high-yielding "junk bonds," sparking a huge selloff in the so-called "junk" bond market as investors liquidate their shares in exchange traded funds and mutual funds that invest in risky debt -- mainly of energy companies -- to avoid the possible fallout of more defaults.
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But U.S. stocks have stabilized along with U.S.-based crude. Crude rebounded and closed up about 2% Monday and is up $1.35, or 3.7%, to $37.66 Tuesday.
The high-yield bond market seems more stable today, too. After drops of 2% on Friday and another 0.9% Monday, the iShares iBoxx $ High Yield Corporate Bond exchange traded fund (HYG) was up 1.7% Tuesday.
"Risky assets are bouncing as oil and high-yield credit stabilize," Cagdas Aksu of Barclays told clients in an early-morning research note. "After the wild moves in high yield spreads and oil yesterday, markets are stabilizing." he wrote.
Investors are also gearing up for Wednesday's Fed meeting, when the U.S. central bank is expected to hike short-term interest rates for the first time since 2006, despite the recent turbulence in financial markets. Wall Street, which widely expects a rate increase, will be closely watching what the Fed and Fed Chair Janet Yellen say about the pace of future rate hikes.
The general consensus is that Yellen will reassure markets that the pace of increases in 2016 will be very slow and deliberate, a so-called dovish message that would reduce some of the angst and fallout of any rate hike.
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"The Fed is expected to raise rates on Wednesday, and then be cautious about any further raises," says Patrick Adams, a portfolio manager at Choice Investment Management.
In recent days the direction of stock prices has been driven by the turbulence in the oil patch and credit markets as well as uncertainty tied to the Fed's interest rate policy.
Plunging prices in the high-yield debt market is worrying investors, who fear that the problems in risky bonds tied to the energy sector could spread to other parts of the fixed-income complex and cause broader problems for markets. Exchange traded funds that track and mimic high yield bond indexes have taken big hits recently, falling more than 10% in a broad, swift selloff. Many mutual funds that offer these types of funds are also experiencing fund outflows as investors sell their high-yield holdings to avoid more pain.
Stocks in Europe were up sharply, too, on Tuesday, erasing a large chunk of Monday's sizable losses. The broad Stoxx Europe 600 index was up 3% and shares of the German DAX was up 3.1% and the CAC 40 in Paris was 3.2% higher.
Adam Shell on Twitter: @adamshell.