Wall Street powers back

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NEW YORK (CNNMoney.com) -- Stocks rallied Wednesday, with the Dow bouncing back from a more than 300-point loss earlier in the session as investors jumped back into a variety of sectors after the recent battering.

The Dow Jones industrial added almost 300 points, after having fallen more around 326 points earlier in the session.

The Standard & Poor's 500 (SPX) index rose 2.1 percent and the Nasdaq composite gained 1 percent. Both indexes had slumped during the session.

Stocks have been hit hard in 2008, amid fears that the credit and housing market crises will send the U.S. economy into recession.

Global stocks slipped too, prompting the Federal Reserve to step in Tuesday and announce an emergency intermeeting interest rate cut, a decision that initially had a mixed impact on stocks, but helped pave the way for Wednesday's bounce back.

Also helping: reports that New York regulators and banks met to discuss a means of raising money for struggling bond insurers, Briefing.com reported. That sent shares of Ambac Financial and MBIA surging.

The rally was also sparked by short-covering, the process by which traders who have sold shares short to take advantage of a falling market need to buy them back.

"Although stock prices might fall tomorrow and beyond, the market did just contract more than 2,000 points in three months, and so people are going to be willing to jump in to certain areas," said Gary Webb, CEO at Webb Financial Group.

By early afternoon, the Dow had fallen over 2500 points from its all-time high of 14,164.53 hit on Oct. 9. the S&P 500 had lost over 18 percent from its all-time high in October.

The Nasdaq had tanked more than 22 percent from its cyclical high in October.

After the close Wednesday, eBay (EBAY, Fortune 500) warned that first-quarter and 2008 results won't meet estimates. The online auctioneer also reported fourth-quarter results that topped estimates, but investors focused on the warning, sending shares lower in extended-hours trading.

eBay also said that CEO Meg Whitman will be stepping down in March, around the time of her 10-year anniversary, as had been expected.

Financial sector: Big banks jumped, with JP Morgan Chase (JPM, Fortune 500) gaining nearly 12 percent. Citigroup (C, Fortune 500), Merrill Lynch (MER, Fortune 500), Morgan Stanley (MS, Fortune 500) and Lehman Brothers (LEH, Fortune 500) all rallied as well.

The banks also benefited after Bear Stearns upgraded the sector, citing the potential for upside as a result of the Fed's interest rate cut.

On Tuesday, the federal reserve cut the fed funds rate, a key overnight bank lending rate that impacts consumer loans, by three-quarters of a percentage point to 3.5 percent. Some investors are expecting the Fed to cut rates further when the central bank policy makers meet next week, suggesting that Fed still sees risks to growth.

Elsewhere in the financial sector, Bank of America (BAC, Fortune 500) shares surged after the company said its planning a stock sale to raise $6 billion in capital. The company also reported quarterly earnings that were short of forecasts.

The Fed rate cut: The turmoil in global markets prompted the Federal Reserve to abruptly cut interest rates three-quarters of a percentage point, to 3.5 percent, on Tuesday. The Dow initially dropped 450 points on the news, but recovered to finish down 128.

Harry Clark, founder and CEO of Clark Capital Management, said the markets are still digesting the Fed's action, which he called an "historic event."

Earnings reports: After the market closed Tuesday, iPod and iPhone maker Apple (AAPL, Fortune 500) reported strong earnings for the fourth quarter but warned that the current quarter could be pressured by slowing consumer spending. Apple shares fell nearly 11 percent, cutting bigger morning losses.

On Wednesday morning, Motorola (MOT, Fortune 500) warned that it will fall to a loss in the first-quarter as it struggles to turnaround its beleaguered handset division. The company also reported and 84 percent drop in fourth-quarter profits. Shares plummeted 18.8 percent.

Dow component Pfizer (PFE, Fortune 500) reported sales and earnings that beat Wall Street estimates and raised its full-year sales projections. Shares gained 2.8 percent.

In other news, the Congressional Budget Office expects the U.S. budget deficit to grow to $250 billion this year, though that number may need to be revised once an economic stimulus package being debated in Washington is released.

The Bush administration proposed a $145 billion plan to boost the nation's economic activity last week, but details have not been finalized.

Market breadth was positive. On the New York Stock Exchange, winners beat losers almost three to one on volume of 2.83 billion shares. On the Nasdaq, advancers beat decliners by roughly three to two on a volume of 3.64 billion shares.

Treasury prices tanked as investors took profits after the recent advance. The decline sent the 10-year note yield up to 3.60 percent from 3.44 percent late Tuesday. The yield on the 2-year note briefly reached a four-year low of 1.86 percent during Wednesday's session before recovering.

In currency trading, the dollar rose versus the yen and eased versus the euro.

U.S. light crude oil for March delivery fell $2.86 to settle at $86.99 a barrel on the New York Mercantile Exchange.

COMEX gold fell $7.20 to settle at $883.10 an ounce.