The return of what's called "Merger Monday" on Wall Street made investors more optimistic about the future. So did a report that showed Japan's economy shrank less than feared following the March 11 earthquake and tsunami. That helped temporarily ease worries that the U.S. economy may slide into another recession.
The Dow rose 183 points, or 1.6 percent to 11,451 at 2:30 p.m. in New York. The Dow is 6.81 points above where it started last week, and it is on track for its first three-day gain since July 1. The Standard & Poor's 500 index rose 15, or 1.4 percent, to 1,195. The Nasdaq composite index rose 20, or 0.8 percent, to 2,529.
Markets may have stabilized, but financial analysts warned investors not to assume that stocks have fully settled down after last week's swings. The Dow rose or fell by at least 400 points in four straight days for the first time ever. The first-ever downgrade of the U.S. credit rating triggered the volatility. It was worsened by concerns that Europe's debt problems are worsening and that the U.S. economy is weakening.
"You might have these moments of quiet, but the debt crisis in Europe did not go away," said John Hailer, chief executive for the U.S. and Asia of Natixis Global Asset Management. "Our issues with the debt, with what our tax policy is going to be going forward, our unemployment did not go away."
"We are probably going to have to look at some very different levels of volatility than what a lot of investors grew up with over the last 25 to 30 years," he said.
Hailer said investors seeking protection from volatility have poured dollars into mutual funds that bet on falling stock prices and use other alternative strategies. About 20 percent of all new investment dollars coming into Natixis are for such funds, up from 8 percent in 2009.
A period of relative stability has been common in past volatile markets. In 2008, stocks plunged between mid-September and mid-November. From mid-November until the beginning of January 2009, the Dow was in a lull of sorts. It ratcheted up and down, mostly in the high 8000 range. But in early January, it began to plunge again before hitting a bottom of 6,547 March 9.
More swings could be on the way this week. The leaders of France and Germany meet Tuesday to discuss Europe's debt problems. Spain and other countries have borrowed so much that they may need help to repay their bills. Investors on Tuesday will get an update on how Spain's economy did during the second quarter.
On Monday, corporate deals dominated the news. The biggest was Google Inc.'s $12.5 billion cash purchase of wireless phone maker Motorola Mobility Holdings Inc. It is also the biggest acquisition in Google's history. No. 2 was its $3.2 billion purchase of DoubleClick in 2008. Motorola Mobility's stock jumped percent 55.8 percent. Google fell 1.8 percent.
Among other deals: Time Warner Cable Inc. said it will pay $3 billion in cash for Insight Communications Co., which has more than 750,000 cable customers in the Midwest. Agribusiness conglomerate Cargill said it will buy animal nutrition company Provimi of the Netherlands for $2.16 billion. And in the energy industry, offshore driller Transocean Ltd. said it will buy Aker Drilling of Norway for $1.43 billion in cash.
It was the busiest day for acquisitions since July 11, when Express Scripts said it would buy Medco Health Solutions for $29.1 billion in a combination of the country's largest pharmacy benefits managers. So far this year, the total value of deals targeting U.S. companies has climbed to $771 billion, according to Dealogic. That's up 55 percent from $498 billion at the same point of last year.
Companies across the United States have accumulated a record amount of cash since the recession ended. They have increased their cash reserves every quarter for more than two years, and businesses in the S&P 500 index had a total of $963.3 billion at the end of March, according to the most recent data from Standard & Poor's.
Investors have waited for companies to use some of that cash on acquisitions, dividend increases and stock buybacks. Many financial analysts believe that companies are more confident about the future if they're willing to buy other businesses. So a series of acquisition announcements tends to send stocks higher.
The growing cash hoard has been the result of stronger profits. Companies have kept costs low by being slow to hire. Revenue, meanwhile, is growing, particularly from overseas customers. For the 460 companies in the S&P 500 that have reported second-quarter results, total earnings are up 12 percent from a year ago.
Some companies are looking to pare back. Bank of America Corp. said it will sell its $8.6 billion Canadian credit-card business to TD Bank Group. The bank will also get out of the credit card business in Britain and Ireland. The deals follow others that Bank of America made to move out of foreign credit cards, and they should help Bank of America improve its balance sheet
Bank of America rose 8.7 percent, part of a rally for the overall industry. Financial stocks in the S&P 500 rose 3 percent, tied for best among the 10 industries that make up the index.
Asian and European markets rose earlier after Japan said its economy shrank at just a 1.3 percent annual rate between April and June. That's less than half the drop that economists expected following the earthquake, tsunami and nuclear crisis that struck the country in March.
Still, investors have more reason to worry about the weak U.S. economy.
Manufacturers in New York told the Federal Reserve they're more pessimistic about future growth. Manufacturing has been one of the country's strongest industries since the recession ended in 2009, but growth began to slow in March. Manufacturing nationwide barely grew in July.
Homebuilders are also pessimistic. A survey by the National Association of Home Builders showed they are no more confident in the weak housing market than they were two years ago. Sales of new homes have been stuck at an annual pace of about 300,000 homes since October. In 2006, new home sales topped an annual pace of 1 million in nine of the 12 months.
Cosmetics company Estee Lauder Cos. fell 7 percent after it forecast earnings for the upcoming year that were below Wall Street's expectations. It also said its net income rose 72 percent last quarter on strong sales growth to China, Russia and the Middle East.
Lowe's Cos., the second-largest home improvement retailer, rose 0.4 percent after it said its net income was roughly flat last quarter on a 1 percent rise in revenue.