Dow surges 331 points

NEW YORK (CNNMoney.com) -- Stocks surged Wednesday, with the Dow industrials rallying 331 points, after comments from a Federal Reserve official sparked bets that the central bank will cut rates again at its next policy meeting.

A rebound for the embattled financial sector and plunging oil prices helped Wall Street advance for the second session in a row.

The Dow Jones industrial average (Charts) gained 331 points, its second-best single day advance of the year. The 30-stock index climbed by as much as 366 points during the session.

The broader S&P 500 index (Charts) rose about 2.9 percent and the tech-fueled Nasdaq (Charts) climbed 3.2 percent. The Russell 2000 (Charts) small-cap index gained 3.6 percent.

Stocks rallied Tuesday as well. The two-day advance boosted the Dow by 546.01 points, giving it its best two-day run on a point basis since October 2002.

Wednesday's big rally was sparked by comments from Donald Kohn, the Federal Reserve's No. 2 official. Kohn seemed to signal a change in recent Fed policy, saying that the recent market turmoil has reversed some of the improvements in market functioning seen at the time of the last Fed meeting at the end of October.

He said that the central bank needs to be "nimble" and that it can't risk a threat to the economy just to teach speculators a lesson.

Stock participants seemed to take this as an indication that the Federal Reserve plans to cut a key short-term interest rate at the Dec. 11 meeting, as investors have been hoping. Investors will be looking to see if Federal Reserve Chairman Ben Bernanke reaffirms this viewpoint when he speaks Thursday night.

Wall Street cheered the news, building on Tuesday's advance, as investors bet that it is more likely now that the central bank will cut interest rates by at least a quarter-point when it meets on Dec. 11. The fed funds rate, a key bank lending rate, stands at 4.5 percent.

But helping stocks higher was rabid bargain hunting by investors, just two days after the market fell into the technical definition of a correction. The major gauges ended Monday's session at least 10 percent off the recent highs, from October.

Stocks then bounced off those levels, led by some of the sectors hit the hardest in the recent selloff, including financials.

"We have gotten to pretty dramatic oversold levels, but that's just part of it," said Michael James, manager of equity trading at Wedbush Morgan.

"You have oil down over $6 in two days, gold down $20 in two days...the dollar rally has taken money out of those commodities and is helping U.S. equities," he said.

Thursday brings the revision to third-quarter GDP growth, and the October new home sales index. Dell (Charts, Fortune 500) earnings are due after the close of trade Thursday.

Market breadth was positive. On the New York Stock Exchange, winners beat losers six to one on volume of 1.76 billion shares. On the Nasdaq, advancers topped decliners by nearly four to one as 2.51 billion shares exchanged hands.

Among the biggest stock gainers were the embattled financials. Shares of Wall Street's biggest banks including Citigroup (Charts, Fortune 500), Goldman Sachs (Charts, Fortune 500), Merrill Lynch (Charts, Fortune 500) and Morgan Stanley (Charts, Fortune 500) were all sharply higher. The AMEX Securities Broker/Dealer index (Charts) gained nearly 6 percent.

Meanwhile, Wells Fargo (Charts, Fortune 500) said late Tuesday that it would take a $1.4 billion hit in the fourth quarter for loan losses related to home equity loans. However, shares of the bank jumped with the broader market Wednesday, perhaps on relief that the hit wasn't bigger.

Investors also sent Freddie Mac (Charts, Fortune 500) shares up over 14 percent, even after it cut its dividend in half and said it would sell $6 billion of stock to bolster its finances in anticipation of additional losses. The mortgage finance firm last week announced a $2 billion loss.

But gains were broad based, with all 30 Dow stocks rising, led by AIG (Charts, Fortune 500).

A steep decline in oil prices gave a boost to companies that directly depend on fuel, such as airlines, railroads and truckers. The Dow Jones Transportation (Charts) average gained 3.6 percent.

Oil prices fell sharply for the second straight day on a smaller-than-expected dip in crude oil and distillate supplies. Light, sweet crude for January delivery tumbled $3.80 to settle at $90.62 a barrel Wednesday on the New York Mercantile Exchange.

Treasury prices tumbled as investors pulled money out of bonds for a second straight session. Corresponding yields headed higher, lifting the yield on the 10-year note to 4.03 percent from 3.94 percent late Tuesday.

In currency trading, the dollar gained versus the euro and yen.

COMEX gold for February delivery tumbled $14 to settle at $807.20 an ounce, falling along with other dollar-traded commodities.

Investors appeared to be unfazed by a flurry of soft economic readings and more troubling news from the financial sector.

The Federal Reserve said that the economy grew at a slower pace in the late fall in its Beige Book survey of regional economic conditions. The slowdown was a result of consumers and businesses feeling the squeeze of the housing slump and the credit market crisis.

Existing new home sales fell to an all-time low in October, according to the latest reading from the National Association of Realtors. (Full story).

An earlier report showed a bigger-than-expected drop in durable goods orders in October.