Big day on Wall Street

NEW YORK (CNNMoney.com) -- Stocks surged Wednesday, erasing the previous day's losses, as investors took a big drop in the yen and encouraging comments from the chairman of the Federal Reserve as signs that the recent market turmoil is waning.

The Dow Jones industrial average (up 247.44 to 13,289.29, Charts) gained 1.9 percent and the broader S&P 500 (up 31.40 to 1,463.76, Charts) index added 2.2 percent. The Nasdaq Composite (up 62.52 to 2,563.16, Charts) and the Russell 2000 (up 19.49 to 787.32, Charts) small-cap index both gained 2.5 percent.

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The major gauges began the session in positive territory - as investors stepped back in after a two-day bloodletting - and built on those gains throughout the session.

A wish to scoop up so-called bargains after the selloff helped fuel the rally, as did a big drop in the yen, said Donald Selkin, director of research at Joseph Stevens.

The yen saw its biggest one-day percentage drop against the euro in three years, and against the dollar in two years, Reuters reported, as investors sought to bail out of the low-yielding currency for riskier investments. The move was seen as reflecting a sense that the panic about the credit and mortgage markets is easing, at least temporarily.

"The yen had this big loss, which gives people confidence to invest in other assets," Selkin said. "Plus, you have these momentum players that jump in during the afternoon and accelerate the trend."

The stock rally found its second wind in the last hour of trade in response to the release of a letter Federal Reserve Chairman Ben Bernanke sent to Democratic Sen. Charles Schumer, of NY. In the letter, Bernanke again stated that the Fed was monitoring trouble in the financial markets, and was prepared to step in and take action if necessary.

This reassured investors unnerved by the outdated minutes from the Aug. 7 Fed policy meeting, released on Tuesday, in which the bankers seemed more focused on housing and inflation than the turmoil in financial markets.

Bernanke also stated that he saw no need for the government to lift the portfolio caps on housing finance leaders Fannie Mae (Charts) and Freddie Mac (Charts, Fortune 500), a move Schumer and other congress members have advocated for. Their argument is that the lifting of the caps would allow more people with good credit to get mortgages. (For more details, click here).

Investors also took comfort Wednesday in comments made by noted economist Edward Hyman, Selkin said.

Hyman, the Chairman of International Strategy and Investment Group, said in a published report that the Federal Reserve will probably end up cutting the fed funds rate to 4 percent, gradually, 25 basis points at a time, over several meetings. The Fed funds rate currently stands at 5.25 percent.

Stock gains were broad based, with all 30 Dow components rising, led by Home Depot (up $1.50 to $36.55, Charts, Fortune 500), Hewlett Packard (up $1.54 to $48.42, Charts, Fortune 500), Intel (up $1.13 to $25.09, Charts, Fortune 500), General Motors (up $1.41 to $30.59, Charts, Fortune 500), Alcoa (up $1.03 to $36.39, Charts, Fortune 500), AT&T (up $1.41 to $40.20, Charts, Fortune 500) and United Technologies (up $2.35 to $74.35, Charts, Fortune 500).

"You're seeing a bounce back today, with people realizing that they overreacted yesterday," said Douglas Roberts, managing principal at Channel Capital Management.

While the recovery Wednesday was certainly a relief to investors, it probably doesn't signal a new period of constancy for markets, said Greg Church, president at Church Capital.

"You're going to continue to see these huge gyrations like yesterday and today," Church said. "At some point, like yesterday, we get a little oversold and things get cheap, but then you get rumors about the financial sectors and it's back down again."

Church said that there won't be any stability until the next Fed policy meeting on Sept. 18, or until the markets hear something from the Fed that suggests a rate cut.

Stocks got battered over the summer amid worries about the tightening credit market and the subprime mortgage market. After bottoming in mid-August, stocks have recovered from the recent lows on bets that the Federal Reserve will cut short-term interest rates at the next policy meeting.

Those bets were sparked as the central bank infused billions into the U.S. banking system, and cut its discount rate - which affects bank loans. Yet now investors are looking for the Fed to cut the fed funds rate, which affects consumer loans.

Investors will be looking to Fed chairman Ben Bernanke to provide more hints about this when he speaks Friday at an economic symposium in Jackson Hole, Wyoming.

Bernanke is likely to stress that the central bank is aware of and concerned about the trouble in the financial markets, Roberts said, but he is also likely to reiterate that any future action is dependent on the upcoming economic data.

Ahead of that, Thursday brings the revision of second-quarter gross domestic product growth.

U.S. light crude oil for October delivery rose $1.78 to settle at $73.51 a barrel on the New York Mercantile Exchange, spiking after the government's weekly inventory report showed a bigger-than-expected drop in oil and gas supplies.

The jump in oil prices boosted oil services stocks including Exxon Mobil (up $2.23 to $85.23, Charts, Fortune 500), Valero Energy (up $2.14 to $68.16, Charts, Fortune 500) and Sunoco (up $2.88 to $71.30, Charts, Fortune 500).

Among other movers, Apple (up $7.26 to $134.08, Charts, Fortune 500) rose on speculation that its Sept. 5 media event will include the launch of a new iPod.

Seagate Technology (up $0.93 to $25.39, Charts) shares rose after the company boosted its fiscal first-quarter earnings and revenue forecast late Tuesday, citing stronger demand and better prices. Seagate makes computer hard-disk drives.

Dow component Altria (up $0.73 to $69.80, Charts, Fortune 500) said it will spin off its Philip Morris international unit, confirming market speculation. Altria also said it was boosting its quarterly dividend by 8.7 percent to 75 cents per share.

On the downside, PDL Biopharma (down $4.80 to $18.80, Charts) slumped over 20 percent in unusually active Nasdaq trade after saying Tuesday that it was withdrawing its 2007 financial guidance and divesting its marketed drugs. The biotech also said that an experimental drug in late-stage trials failed.

Market breadth was positive and volume was light relative to recent weeks. On the New York Stock Exchange, winners beat losers by more than 5 to 1 on volume of 1.33 billion shares. On the Nasdaq, advancers beat decliners 3 to 1 as 1.67 billion shares changed hands.

Treasury prices fell, raising the yield on the 10-year note to 4.56 percent from 4.51 percent late Tuesday. Bond prices and yields move in opposite directions.

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

COMEX gold for December delivery rose $1.90 to settle at $675.40 an ounce.