Stocks End Higher in Volatile Session

Indexes gyrated Monday as investors weighed better than expected economic data competed against renewed concerns over the financial sector

U.S. stocks finished higher in a volatile session Monday as the market recouped a small portion of Friday's losses.

Indexes had climbed early in the session following some favorable economic data on manufacturing sentiment, pending home sales, and construction spending, but turned negative in the afternoon amid renewed concerns about the economy and the health of the financial sector. The downswing came after President Obama said more U.S. jobs will be lost in the coming weeks, the New York Fed warned key bankers about high executive pay, and a Fed administrator said bank loan quality is rather poor.

On Monday, the 30-stock Dow Jones industrial average finished higher by 76.71 points, or 0.79%, at 9,789.44. The broad Standard & Poor's 500-stock index was up 6.69 points, or 0.65%, at 1,042.88. The tech-heavy Nasdaq composite index added 4.09 points, or 0.20%, to 2,049.20.

On the New York Stock Exchange, 20 stocks were lower in price for every nine that advanced. Breadth on the Nasdaq was 18-8 negative.

Treasuries were lower Monday afternoon amid fears the Federal Reserve's policy statement Wednesday might show signs that the central bank is considering raising interest rates. The Fed's two-day policy meeting kicks off Tuesday.

The dollar reversed course to trade higher vs. other major currencies. Gold futures were higher. Oil futures were mixed.

Traders were bracing for the FOMC's two-day meeting. The markets are on high alert for rate hikes from the Fed, notes BofA Merrill economist Ethan Harris, as recent chatter has raised concerns that the Fed will soon drop its promise to keep rates low for an "extended period."

"We do not view this as likely. We believe the Fed is a long way from even thinking about hiking rates as slack in the economy remains high, bank credit remains tight and there are no signs inflation expectations are rising," says Harris.

In addition to the start of the Fed meeting Tuesday, investors will also pay attention to a report on U.S. factory orders, which are expected to have climbed 1.0% in September after falling 0.8% in August.

The 3.5% growth in the U.S. economy in the third quarter was largely driven by government stimulus efforts. Investors are worried that once those measures expire, high unemployment and weak consumer spending will put a strain on the economy. This week, economic data, including the government's monthly employment report on Friday, will offer investors a glimpse at the fourth quarter and be pivotal in determining where the market heads during the remainder of the year.

The financial sector returned to the spotlight Monday. New York Fed President William Dudley called on bank executives to remain disciplined about compensation practices, given the climate on Wall Street, specifically calling for further progress in the discussion on compensating risk takers.

Meanwhile, Jon Greenlee, an associate director at the Fed's banking division, expressed pessimism on the banking sector, according to Congressional testimony. Greenlee said "significant stresses and weakness persist" in spite of the improved conditions and sentiment in the financial markets. Borrowing by businesses and consumers remains weak, while loan quality had deteriorated "significantly." Credit losses continue to rise and banks face risk of additionally sizable losses. Greenlee said it will take some time for the banking sector to work through this current set of challenges, and for the financial markets to fully recover.

President Barack Obama said Monday that the U.S. economy has pulled "back from the brink" and the government must now "get serious" about reducing debt and helping spur job growth. Addressing a panel of business and labor leaders and economists, the president said it will require "bold, innovative action" on the part of the government and private industry to bring the unemployment rate down and lay the foundation for future growth. "We just are not where we need to be yet," Obama told his Economic Recovery Advisory Board, headed by former Federal Reserve Chairman Paul Volcker. Along with helping spur job growth, "The government is going to have to get serious about reducing our debt levels."

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