Wall Street's blue-chip rally

NEW YORK (CNNMoney.com) -- Blue chips led a broad advance Thursday, as investors eyed upbeat news on GM, McDonald's and Countrywide Financial - and continued to bet that the Federal Reserve will cut interest rates next week.

The Dow Jones industrial average (up 133.23 to 13,424.88, Charts) added 133 points, or 1 percent, while the broader S&P 500 (up 12.39 to 1,483.95, Charts) index gained 0.8 percent. The tech-fueled Nasdaq composite (up 8.99 to 2,601.06, Charts) added 0.4 percent.

The day's positives - including a narrower-than-expected rise in weekly jobless claims - seemed to help investors overlook oil prices at around $80 a barrel and the U.S. dollar at an all-time low versus the euro.

In the bond market, treasury prices slumped, boosting the corresponding yields.

"It's another blue-chip rally," said Peter Cardillo, chief market economist at Avalon Partners. "The market is responding to the good corporate news today and continuing to rally on an expected Fed rate cut next week."

(For more on stocks and the Fed, click here.)

General Motors (up $3.04 to $33.29, Charts, Fortune 500) jumped 10 percent after Citi Investment Research began coverage of the stock with a "buy" rating and a $41 12-month price target, with the analyst reflecting optimism about a potential labor deal.

However, after the close of trade, the AP reported that the United Auto Workers union have decided that GM would be the lead company and a potential strike strike target in any negotiations the union is conducting with the Big Three automakers.

Fellow Dow component McDonald's (up $3.10 to $54.30, Charts, Fortune 500) gained 6 percent after the fast-food retailer announced late Wednesday that it is boosting its annual dividend by 50 percent to $1.50 per share.

Countrywide Financial (up $2.31 to $18.93, Charts, Fortune 500) jumped almost 14 percent in active New York Stock Exchange trading after the mortgage lender said it has received another $12 billion credit line.

The upbeat corporate news deflected any anxiety that investors might have felt about higher oil prices and the weaker dollar.

U.S. light crude oil for October delivery rose 18 cents to settle at $80.09 a barrel on the New York Mercantile Exchange, a record closing high.

Oil prices briefly hit an all-time session high of $80.20 a barrel earlier Thursday. However, the record price is still below inflation-adjusted highs hit in the early 1980s, which would be equal to at least $95 a barrel today.

Oil prices have advanced about 30 percent in 2007.

In currency trading, the dollar fell to another record low versus the euro and inched higher against the yen.

Treasury prices fell Thursday, raising the yield on the 10-year note to 4.46 percent from 4.41 percent late Wednesday. Bond prices and yields move in opposite directions.

COMEX gold for December delivery fell $2.80 to settle at $717.90 an ounce.

On Wednesday, stocks slipped in volatile trading, as investors weighed worries about record oil prices with bets that the Federal Reserve will cut a key short-term interest rate at next week's policy meeting.

Trading volume was light due to Rosh Hashana, one of the biggest Jewish holidays. Thursday was also the start of the Muslim holy month of Ramadan.

On the New York Stock Exchange, winners beat losers 9 to 7 on volume of 1.27 billion shares. On the Nasdaq, advancers beat decliners by a narrow margin on volume of 1.69 billion shares.

In addition to GM and McDonald's, other Dow 30 gainers included Alcoa (up $0.77 to $34.42, Charts, Fortune 500), Exxon Mobil (up $0.97 to $88.62, Charts, Fortune 500), AT&T (up $0.91 to $40.77, Charts, Fortune 500), Verizon Communications (up $0.74 to $42.61, Charts, Fortune 500) and JP Morgan (up $1.13 to $45.60, Charts, Fortune 500).

JP Morgan was one of many financial stocks rising on the session, lifting the Amex Securities Broker/Dealer index by 2.6 percent.

On the downside, Alcatel Lucent (down $0.88 to $9.16, Charts) tumbled 8.8 percent after cutting its sales and profit forecast for the year, due to what it said was tepid wireless spending in North America.

After the close of trade Thursday, Lattice Semiconductor (Charts) warned that third-quarter revenue won't meet previous forecasts, sending the stock down 10 percent in extended-hours trading.

Bets that the Federal Reserve will cut interest rates at Tuesday's policy meeting have boosted stocks of late. The Fed remains the stock market's main focus leading up to the meeting.

The fed funds rate has stood at 5.25 percent since June 2006 as the central bank has sought to balance pricing pressure with the threat of an economic slowdown stemming from the collapse in the housing market.

But the recent rise in mortgage defaults and the credit crunch have convinced investors that the Federal Reserve will have to cut interest rates so as to keep financial markets stable.

The Fed has already cut the discount rate, which affects bank loans, and has injected billions into the banking system to keep liquidity flowing.

But investors are betting the Fed will cut the fed funds rate, which impacts consumer loans, with the debate now about whether the cut will be a quarter- or a half-percentage point.

A quarter-percentage point cut would soothe nervous investors without raising any flags about a possible recession. It would also turn the focus to whether the central bank will cut rates again at its next meeting in late October, said Charles Smith, chief investment officer at Fort Pitt Capital Group.

Anything else could send stocks lower, at least in the short run, he said.

"If they cut a half point, stock market investors are going to think the Fed knows something they don't and that the economy is in worse shape than they realized," he said.

However, should they cut a half, at least investors will think the Fed is done cutting rates for a while and the focus will return to the economy and earnings, he said.

If they don't cut rates at all, stocks could see a big selloff, he said.

Ahead of that, Friday brings the August retail sales report, as well as readings on industrial production and capacity utilization, and consumer sentiment.

Thursday's one economic report of note was the weekly jobless claims report, which showed a smaller-than-expected rise in the number of Americans filing new claims.