Stocks finish with a flourish

NEW YORK (CNNMoney.com) -- Stocks surged Monday, pushing the Dow back above the 9,000 level, as investors welcomed talk of a second economic stimulus plan and an improvement in key lending rates.

The Dow Jones industrial average (INDU) added 413 points, or 4.7% according to early tallies. The Standard & Poor's 500 (SPX) index gained 4.8%. The Nasdaq composite (COMP) added 3.4%.

After the close, American Express (AXP, Fortune 500) reported quarterly earnings from continuing operations of 74 cents per share, topping forecasts of 59 cents and down from 94 cents a year earlier. The company reported revenue of $7.2 billion versus forecasts for $7.31 billion.

Investors cheered comments from Federal Reserve Chairman Ben Bernanke that suggested a second economic stimulus package could be up for discussion. Additionally, comments from Treasury Secretary Henry Paulson and an improvement in lending rates added heft to bets that the credit market freeze is starting to thaw.

But the volatility of recent weeks isn't over, analysts said. Monday's gains reflected the need for traders to take a break from last week's wild swings, if nothing else, said Dean Barber, president at Barber Financial Group.

He said that the huge Dow swings last week of sometimes 1,000 or more points in a single session - between the highs and the lows - have really worn people out.

"I think there's a sense that the selling has gotten overdone, so you're seeing an advance today," Barber said.

"But people shouldn't think that means that we're moving up from here on out," he said. "I think we're still in for a rough ride going forward."

In testimony before the House Budget Committee, Bernanke noted that "with the economy likely to be weak for several quarters and with some risk of a protracted slowdown, consideration of a fiscal package by the Congress at this juncture seems appropriate."

The Bush administration said it was open to the idea. Congressional Democrats have previously said a second stimulus package is needed.

Shortly after Bernanke's speech, Secretary Treasury Henry Paulson gave a statement that a "broad group of banks" is interested in participating in the government's plan to invest $250 billion directly into lending institutions. Paulson also reiterated that the investments should eventually earn a good return for taxpayers.

These announcements helped propel Wall Street. But on a broader level, stocks were up because investors were starting to express optimism, said Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams.

He said investors were encouraged by a weekend cover story from financial weekly Barron's that suggested that the recession won't drag on as long as feared. However, the main factor restoring confidence was an improvement in lending rates over the past week, he said.

"The credit market is the most important thing right now," he said. "We need to see the banks lending to each other again."

He added that the recent drop in Libor, a key bank lending rate, on both an overnight and three-month level, was critical: "We're seeing that the government's efforts are starting to work," Rovelli said.

The morning brought an improved report on the economy as well. The September index of leading economic indicators (LEI) rose 0.3% after falling a revised 0.9% in the previous month. Economists surveyed by Briefing.com thought LEI would fall 0.1%. (Full story)

Stocks slipped Friday at the end of a volatile week as recession fears were countered by Google's earnings and bullish comments from influential billionaire Warren Buffett.

But Wall Street managed to post gains for the week, which included the Dow's biggest one-day point gain ever and the second-biggest point loss ever. For the week, the Dow and S&P 500 both added 4.7% and the Nasdaq added 3.6%.

Credit market: Lending rates improved Monday, building on last week's recovery, as the global initiatives undertaken continued to have an impact.

The South Korean and Dutch governments have now joined the list of nations trying to stem the global financial crisis by making billions in capital available to banks. Several key lending measures reacted, with shorter-term

Libor, the overnight bank-to-bank lending rate, fell to 1.51% from 1.67% late Friday, according to Bloomberg.com, a more than four-year low. The three-month Libor, what banks charge each other to borrow for three months, fell to 4.06% from 4.42% Friday.

Another indicator, the Libor-OIS spread, a measure of cash scarcity, fell to 2.93% from 3.28% Friday.

The TED spread, which is the difference between what banks pay to borrow from each other for three months and what the Treasury pays, narrowed to 2.97% from 3.63% Friday. The spread hit a record 4.65% earlier this month. The wider the spread, the more reluctant banks are to lend to each other.

Treasury prices rallied, lowering the yield on the 10-year note to 3.85% from 3.92% late Friday. Treasury prices and yields move in opposite directions.

The yield on the 3-month Treasury bill, seen as the safest place to put money in the short term, rose to 1.09% from 0.80% late Friday as investors began to pull money out of the safer investment and put it back in stocks. Last month, the yield on the 3-month bill skidded to a 68-year low around 0%.

Company news: AIG (AIG, Fortune 500) said it will start selling off pieces of its business by the end of the year. The troubled insurer also said it expects to be able to repay the $85 billion bridge loan it got from the government last month after it nearly collapsed. AIG shares gained 6%. (Full story)

Ericsson (ERICY) reported weaker profit and higher revenue versus a year earlier, both of which topped estimates. Shares of the telecom gear maker rallied 15%.

Halliburton (HAL, Fortune 500) said it swung to a net loss in the third quartet on debt charges and the impact of a tough hurricane season. However without one-time items, the oilfield services provider reported a profit that was higher than what analysts were expecting. The stock gained 8% and gave a lift to other oil services firms.

Yahoo (YHOO, Fortune 500) slipped after the Wall Street Journal said the company could announce layoffs and other cost-cutting measures Tuesday when it releases quarterly results.

Other markets: U.S. light crude oil for November delivery rose $2.40 to $74.25 a barrel on the New York Mercantile Exchange after hitting a 13-month low last week.

Bets that demand is slowing have sent oil prices lower since crude hit an all-time high of $147.27 a barrel on July 11. So far, instead of providing relief to investors, the decline has been seen as another indication of the global economic slowdown.

Gasoline prices fell another 3.1 cents overnight, to a national average of $2.923 a gallon, according to a survey of credit card activity by motorist group AAA. It was the 33rd consecutive day that prices have decreased - in the past month alone, they're down more than 93 cents a gallon.

COMEX gold for December delivery rose $2.30 to settle at $790 an ounce