A flurry of upbeat economic news pushed stocks sharply higher, reflecting glimmers of optimism about the European debt crisis and the U.S. economy as markets wind down a volatile year.
Investor sentiment has been beaten down in recent months over deep concerns about Europe and the United States, meaning that even a slight turn for the better could lead to a renewed bull market.
The S&P 500 jumped 3 per cent Tuesday, marking the broad index's biggest one-day gain since the end of November. Canada's S&P/TSX composite index rose 1.5 per cent.
Stocks had been showing strength at the start of each trading day for the past five days in a row, only to lose momentum as the day wore on.
Tuesday marked a decisive break in this pattern, which could be the setup for what some traders call a Santa Claus rally – an end-of-the-year boost that follows the Christmas break.
The fuel for such a rally could come from a belief that the global economic backdrop isn't nearly as dire as some believe.
In the U.S., housing starts rose 9.3 per cent in November over the previous month, topping expectations for gains of just 1.1 per cent.
"While it's too early to say that the U.S. housing double-dip recession is definitely over, the signs are promising," said Krishen Rangasamy, senior economist at National Bank Financial Group.
That seems to have been good enough for investors. U.S. home building stocks showed some of the biggest gains in the broad market rally, with PulteGroup Inc. rising 10.4 per cent.
U.S. financials were also strong. Just a day after touching its lowest level since the bear market of 2009, Bank of America Corp. bounced 3.7 per cent.
The gains even held after the U.S. Federal Reserve released a proposal calling for large financial firms to hold more capital and take fewer risks.
In Europe, an auction of Spanish government bonds went smoothly, reflecting greater confidence in the country's financial health and easing concerns about the euro zone's sovereign-debt crisis.
In the auction of three-month Spanish Treasury bills, the yield was just 1.735 per cent, down from 5.11 per cent during an auction in November.
"Hard to believe that we are even talking about the same credit here," said Stewart Hall, senior currency strategist at RBC Dominion Securities.
Yields on Italian 10-year government bonds also fell, dipping below 6.6 per cent from more than 7 per cent just last week – still in troubled territory, but moving in the right direction. As yields fall, bond prices rise.
Meanwhile, a survey of German executives showed greater-than-expected confidence about the business climate there, even as many observers fret over what they see as an oncoming European recession.
The question now is whether the market can continue to move higher until the end of the year. Despite the recent bout of decent economic news, big concerns remain – particularly in Europe.
Fitch Ratings warned on Tuesday that a number of European banks were on watch for a possible credit rating downgrade, affecting names such as France's Société Générale SA and Spain's Banco Santander SA.
Earlier this month, Standard & Poor's said that 15 nations within the euro zone were also at risk of a credit-rating downgrade, with France widely viewed as a top contender for losing its triple-A status.