NEW YORK (CNN/Money) -
Stocks rallied Tuesday as investors responded to a surprisingly strong reading on consumer confidence ahead of the Federal Reserve's widely expected interest rate hike on Wednesday.
The Dow Jones industrial average (up 56.34 to 10,413.43, Charts) rose 0.5 percent and the Standard & Poor's 500 (up 2.85 to 1,136.20, Charts) gained about 0.2 percent.
The Nasdaq composite (up 15.11 to 2,034.93, Charts) index posted the strongest gains in percentage terms, adding nearly 0.8 percent.
Meanwhile, economists and investors are nearly unanimous in their belief that the Fed will raise short-term rates when the central bank's policy-makers announce their decision Wednesday afternoon.
A quarter-point increase in short-term rates is factored into the market, analysts say, and shouldn't upset investors much.
But investors are jittery about what the Fed will say in its statement and what that means for future rate hikes, as well as the slim chance the Fed could raise rates by a half-point Wednesday.
Those concerns helped limit Tuesday's gains, market analysts said.
"Supposedly we all know what the Fed is going to do, which is to raise rates by 25 basis points," or a quarter point, said John Hughes, market analyst at Shields & Co.
"I think that once we get past that and see that we're right, over the next few weeks, the path of least resistance is up."
There are 100 basis points in one percent.
"Some bears had implied that rates will rise by 50 basis points tomorrow, and some people were a bit worried about that," said Michael Carty, principal at New Millennium Advisors.
"But the downward revision to gross domestic product growth last week and comments from Chairman Greenspan have made it clear that they will raise at a measured pace," he added. "I think that's providing some comfort."
Investors also took some comfort from Monday's transition of power in Iraq -- from the Coalition Provisional Authority to a temporary government -- an event that was not expected until Wednesday but was moved up to avoid terrorist strikes.
Although likely to be overshadowed by the Fed focus, Wednesday also brings the June reading on manufacturing in the Chicago area. Due shortly after the open, Chicago PMI is expected to have fallen to 64.0 from 68.0 in May.
As for stocks, Research in Motion (RIMM: down $1.61 to $59.38, Research, Estimates) was likely to be active Wednesday. After the close Tuesday, the handheld device maker reported earnings that rose from a year earlier, topping expectations, due to strong sales of its Blackberry wireless e-mail device. The company also boosted current-quarter earnings forecasts. Shares rallied more than 6 percent in after-hours trade.
Next up for investors after tomorrow: Friday's June payrolls report and the start of second-quarter earnings reports next week.
Analysts said the market isn't likely to break out of its five-month trading range until investors get past this week's events and dive into what is expected to be a strong earnings period.
What moved?
A variety of tech stocks rose Tuesday, boosting the Nasdaq, including Cisco Systems (CSCO: up $0.41 to $23.71, Research, Estimates) and Applied Materials (AMAT: up $0.78 to $19.63, Research, Estimates). Among Dow movers, pharmaceuticals, industrials and aerospace issues led the advance.
In the day's biggest corporate news, Washington Mutual (WM: down $2.84 to $38.47, Research, Estimates) late Monday cut its 2004 profit forecasts, saying an expected rise in long-term rates will hurt its mortgage business, sending its stock tumbling about 7 percent in active New York Stock Exchange trading.
Other banks were also under pressure.
Shares of New York Community Bancorp (NYB: down $0.01 to $19.52, Research, Estimates) initially rallied on new speculation that it may have found a buyer in Citigroup (C: down $0.19 to $46.33, Research, Estimates).
But the gains evaporated as the day wore on, with some analysts issuing notes saying that such a buyout was unlikely, and if it did go through, Citigroup probably wouldn't offer much of a premium on New York Community Bancorp's shares.
Target (TGT: down $1.75 to $42.29, Research, Estimates) fell around 4 percent. The discount retailer warned June sales would miss previous estimates due to a slow second half of the month, which the company blamed on surprisingly cool weather.
On Monday, retail leader Wal-Mart Stores (WMT: down $0.48 to $51.98, Research, Estimates) also warned about June sales, creating some concern about retailers' earnings during the month.
Shares of Nortel Networks (NT: up $0.25 to $4.99, Research, Estimates) and Flextronics (FLEX: up $0.61 to $15.98, Research, Estimates) both rose after Nortel said it will no longer make its own telecom gear, a job Flextronics will now oversee.
Ciena (CIEN: up $0.18 to $3.79, Research, Estimates) and other telecoms also rose, supporting the Nasdaq.
Qualcomm (QCOM: up $2.88 to $71.55, Research, Estimates) gained in response to a bullish Banc of America Securities research note, in which the analyst said the company should benefit as more phone companies build up their high-speed mobile services.
Dow gainers included Caterpillar (CAT: up $1.34 to $78.82, Research, Estimates) and Johnson & Johnson (JNJ: up $0.77 to $55.74, Research, Estimates).
Market breadth was positive. On the New York Stock Exchange, where nearly 1.37 billion shares changed hands, advancers and decliners were nearly even. On the Nasdaq, gainers beat losers by almost three to two on volume of 1.56 billion shares.
Helping support gains was the morning's surprisingly strong consumer confidence report.
The confidence index jumped to 101.9 in June from a revised 93.1 in May, a sign that the threat of rising rates wouldn't hurt consumer spending too much.
Treasury prices rose, pushing the 10-year note yield down to 4.68 percent, compared with 4.73 percent late Monday.
The dollar rose versus the yen and euro.
In commodities markets, NYMEX light sweet crude oil futures fell 58 cents to $35.66 a barrel. COMEX gold fell $8.50 to settle at $392.80 an ounce.
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