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NEW YORK (CNNMoney.com) -- Wall Street rallied Thursday, ending a miserable January on a high note, after comments from bond insurer MBIA helped temper worries that a meltdown in that sector was the next leg of the credit market fallout.

The Dow Jones industrial average (INDU), the broader Standard & Poor's 500 (SPX) index and the Nasdaq composite (COMP) all added around 1.7 percent. The Russell 2000 (RUT.X) small-cap index added 2.5 percent.

Thursday brought a positive end to an otherwise abysmal month, in which stocks were volatile and predominantly weaker on fears that the economy is in a recession or is heading toward one amid the housing and credit market crises. A down January can be a bad indicator for the year. (Click here for details.)

The Nasdaq's January loss of 9.9% is the worst January on record for the tech index, going back to its inception in Feb. 1971, according to the Stock Trader's Almanac.

The Dow lost 4.6% in the month, its worst January since 2000, when it lost almost 4.9%. The S&P 500 lost 6.1%, its worst Jan. since 1990, when it fell 6.9%.

Stocks managed a powerful rally Thursday, but that doesn't mean the market is going to be any less volatile in the short run, said Greg Church, president at Church Capital.

"If you see more good news in the next few days, you'll see stocks rise more," he said. "But if you see more big European banks announcing writedowns or another scare for the bond insurers, this thing could go right back down."

After the close, Google (GOOG, Fortune 500) reported quarterly sales and earnings that were short of forecasts, sending its shares tumbling in extended-hours trading.

Motorola (MOT, Fortune 500) shares rallied after the close after the company said it is thinking of spinning off its mobile unit.

Friday brings the January employment report before the start of trading. Later in the morning, the ISM Manufacturing Index is due, as well as the readings on consumer sentiment and construction orders.

Dow component Exxon Mobil leads the list of companies expected to report earnings Friday morning.

Thursday's market. Stocks had slipped Thursday morning after MBIA's big quarterly loss exacerbated worries that the fallout for bond insurers could be the next leg of the credit market crisis.

But MBIA (MBI) stock erased losses and turned higher after the company's CEO said on its conference call that while it will see big losses this year, it has the resources it needs to maintain its current financial strength rating.

That turnaround added fuel to a recovery in the financial sector already underway, which in turn helped the broader market recover.

"A lot of things were reversing already, and then MBIA came out and defended themselves a little," said Steven Goldman, market analyst at Weeden & Co.

He said that the market backdrop has improved vastly in the last week and a half. It has improved on a technical level, with indications that the selloff has hit a bottom, he said. It has improved in terms of valuations, with some stocks and sectors becoming less expensive relative to earnings because of the selloff. It has also improved because of the two big Federal Reserve interest rate cuts, Goldman said.

"In general, things are improving, but we are still going to need time to work through all of this," Goldman said. In other words, volatility isn't going to disappear anytime soon.

Sectors that have led the retreat were among those leading a recovery Thursday, including homebuilders, retailers and financials.

"The market psychology is beginning to improve," said Peter Cardillo, chief market economist at Avalon Partners.

Stocks ended lower Wednesday, erasing gains sparked by the Federal Reserve's decision to cut the fed funds rate, a key short-term interest rate, by a half-percentage point. It was the second rate cut in a little over a week, with the central bank attempting to give support to the slowing economy and keep money flowing through the system.

The advance had lost steam on market rumors that one of the major bond insurers was likely to be downgraded. It was announced later that Fitch had cut privately owned bond insurer FGIC Group's financial strength rating.

Lowering an insurer's rating makes it harder for the company to get new business, potentially weakens the value of hundreds of billions of dollars in bonds and adds a strain of uncertainty to already shaky financial markets. (Full story).

Economic news. Investors also eyed a surprise jump in weekly jobless claims Thursday ahead of Friday's more closely watched January employment report. In other economic news, December personal income and spending both rose more than expected, while the report's inflation component rose 0.2 percent, in line with forecasts.

Another report, the Chicago PMI, dipped more than expected in January, suggesting further erosion in manufacturing in the Midwest region.

Earnings. After the close Wednesday, Amazon.com (AMZN, Fortune 500) reported higher quarterly earnings that met estimates on higher revenue that topped estimates. The company also forecast slower operating margins in 2008. Shares sagged in the morning, but rallied through the close in tune with the rest of the market.

Also late Wednesday, Starbucks (SBUX, Fortune 500) reported higher quarterly profit that topped estimates but also said that it will open less new U.S. stores in 2008 and close some underperforming ones amid the consumer spending slowdown. Shares slipped Thursday. (Full story).

In other news, Home Depot (HD, Fortune 500) said Thursday afternoon that it is cutting 10 percent of its workforce, or about 500 jobs, due to the weak economy. The stock showed little reaction, holding on to gains accrued before the announcement.

28 out of 30 Dow components rose, led by American Express (AXP, Fortune 500), Caterpillar (CAT, Fortune 500), Citigroup (C, Fortune 500), McDonald's (MCD, Fortune 500) and Wal-Mart Stores (WMT, Fortune 500).

Market breadth was positive. On the New York Stock Exchange, winners topped losers 3 to 1 as 2.19 billion shares changed hands. On the Nasdaq, advancers beat decliners 2 to 1 on volume of 2.87 billion shares.

Other markets. Treasury prices rallied, lowering the yield on the 10-year note to 3.59% from 3.68% late Wednesday. Bond prices and yields move in opposite directions.

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

U.S. light crude oil for March delivery fell 58 cents to settle at $91.75 a barrel on the New York Mercantile Exchange.

COMEX gold for April delivery rose $1.70 to $928 an ounce.

As the S&P goes in January, so goes the year. According to the Almanac, this theory has proven true 91% of the time since 1950. If you factor in flat years, which is how the Almanac counts years where the change was plus or minus 5 percent, the stat is accurate around 75% of the time.

The trend is particularly true when January is a down month. According to the Almanac, every negative January since 1950 was followed by a new or continuing bear market or a flat year.

The stat works partly because January is such a pivotal month. New Congresses meet. A new president is inaugurated. A sitting president gives the State of the Union address. The year's budget is set.

What complicates the stat is that 2008 is an election year, which tends to be an up year, according to the market historians. That's because in an election year, the party in power typically does what it can to goose the economy and stay in power. Going back to Theodore Roosevelt in 1905, the Almanac found that 17 of the last 25 election years were up years for the Dow.