NEW YORK (Reuters) - Stocks ended higher on Thursday after a major bond insurer reassured investors about its stability, fueling a rebound by financial shares hammered recently by the prospect of crumbling credit markets.
Even with the day's strong advance, the S&P 500 capped its worst January performance since 1990 as crises in the credit and housing markets stirred fears the U.S. economy was at the edge of a recession. The Nasdaq had its weakest start to a year ever.
The market rallied after MBIA Inc (MBI.N), the No. 1 U.S. bond insurer, said it had enough cash to run its business of guaranteeing payments on corporate and municipal bonds. Standard & Poor's also told the company it had enough capital to keep its triple-A rating, MBIA executives said.
Financial shares, including Bank of America Corp (BAC.N), rallied on the news. A downgrade could lead to billions of dollars of more losses and write-downs related to the subprime mortgage meltdown.
MBIA shares jumped 11 percent, while those of rival Ambac Financial Group Inc (ABK.N), advanced 9.2 percent.
"MBIA basically came out and said the fears are overblown, they're not going bankrupt, they've got plenty of capital, they're not going to lose their 'AAA' status," said Anthony Conroy, head trader for BNY ConvergEx, an affiliate of the Bank of New York.
"That alleviated a lot of fears and you started to see bargain hunters come in, people covering some shorts," he said.
The Dow Jones industrial average (.DJI) shot up 207.53 points, or 1.67 percent, to 12,650.36. The Standard & Poor's 500 Index (.SPX) gained 22.74 points, or 1.68 percent, to 1,378.55. The Nasdaq Composite Index (.IXIC) advanced 40.86 points, or 1.74 percent, to 2,389.86.
For the month, the Dow lost 4.6 percent, marking its worst January since 2000. The S&P lost 6.2 percent, its worst January since 1990. For the Nasdaq, the 9.9 percent decline on the month was its worst-ever January performance.
Shares of Bank of America, the largest U.S. bank by market value, led financial stocks on the S&P 500, rising 5.1 percent to $44.35, while those of credit card and travel services company American Express Co (AXP.N) led Dow financials with a 4.2 percent to $49.32 on the New York Stock Exchange.
Shares of Citigroup Inc (C.N) were another standout, finishing up 2.4 percent at $28.22.
Investors also bought shares of retailers, including Wal-Mart Stores Inc (WMT.N), which gained 3.5 percent to $50.88 on the NYSE. Major manufacturers and homebuilders also climbed on hopes lower interest rates would ease the housing slump's drag on the economy.
Shares of Caterpillar Inc (CAT.N), the maker of heavy equipment, were the Dow's biggest advancer, finishing up 4 percent at $71.14 on the NYSE. Among home builders, shares of Toll Brothers (TOL.N), a luxury home builder, climbed 6 percent to $23.28.
The S&P financial index (.GSPF) closed up 2.7 percent and the Dow Jones home construction index (.DJUSHB) advanced 9.7 percent. On the Nasdaq, Apple Inc (AAPL.O), the maker of the iPod and the iPhone, was among the top advancers, finishing with a gain of 2.4 percent to $135.36.
Encouraging news on bond insurance sector also came from New York Gov. Eliot Spitzer, who said he and the state insurance superintendent were making good progress in devising a plan to stabilize bond insurers.
Even so, trading was volatile, and indexes retreated from gains of more than 2 percent in the last half hour of trading.
A late market swoon was sparked by Standard & Poor's ratings cut of bond insurer FGIC Corp and putting MBIA on review for a possible downgrade, said Tim Smalls, head of U.S. stock trading at brokerage firm Execution LLC in Greenwich, Connecticut.
"It was enough to give everybody a quick scare going into the end of the month, at the end of the trading day, on a volatile week," said Smalls.
After the bell, shares of Google Inc (GOOG.O) tumbled more than 6 percent from a Nasdaq close of $564.30 after the Web search leader's quarterly earnings missed Wall Street estimates.
Trading was heavy on the New York Stock Exchange, with about 2.19 billion shares changing hands, above last year's estimated daily average of roughly 1.9 billion. On Nasdaq, about 2.84 billion shares were traded, above last year's daily average of 2.17 billion.
Advancing stocks outnumbered declining ones by a ratio of about 8 to 3 on the NYSE and by 9 to 5 on Nasdaq.
(Additional reporting by Herb Lash; editing by Gary Crosse)