By Lu Wang and Aubrey Pringle
---- — NEW YORK — U.S. stocks rose Wednesday, rebounding from the benchmark index's biggest two-day slump since June, amid optimism that President Barack Obama's nominee for Federal Reserve chairman, Janet Yellen, won't rush to withdraw stimulus and signs that lawmakers could raise the debt ceiling.
Hewlett-Packard rallied 8.9 percent after saying it expects to return more cash to shareholders and see revenue stabilize after a multiyear decline. Alcoa gained 2 percent amid better-than-forecast profit. Yum! Brands sank 6.7 percent after third-quarter income fell 68 percent on lower same-store sales in China.
The Standard & Poor's 500 index climbed 0.1 percent to 1,656.40. The Dow Jones industrial average added 26.45 points, or 0.2 percent, to 14,802.98. The Nasdaq Composite index fell 0.5 percent to 3,677.78, extending its three-day slide to 3.4 percent, the most since June 24. About 7.1 billion shares exchanged hands on U.S. exchanges today, 15 percent above the three-month average.
The S&P 500 retreated 2.1 percent over the previous two days as concern grew that lawmakers may not raise the federal debt ceiling in time to avoid a government default. Economists say failure by the world's largest borrower to pay its debt will devastate stock markets from Brazil to Zurich and throw the U.S. and world economies into a recession.
The S&P 500 erased an earlier loss of as much as 0.5 percent Wednesday and the Dow rallied after touching its lowest level since June as some possible paths out of the partisan impasse in Washington started to emerge.
House Republican and Senate Democratic leaders are open to a short-term increase in the debt limit, said congressional aides of both parties who spoke on condition of anonymity to discuss strategy.
If Republicans move toward an increase, they're choosing an option President Barack Obama opened Tuesday, when he said he would accept a short-term debt limit increase and then enter broader fiscal negotiations. House Republicans will send a small group of negotiators to the White House on Thursday, Brendan Buck, spokesman for House Speaker John Boehner, said in an email.
The U.S. government is in the ninth day of a partial shutdown and just over a week before U.S. borrowing authority lapses Oct. 17.
Obama nominated Yellen, the current Fed vice chairman and an architect of its stimulus program, to succeed Ben Bernanke as chairman. As a top deputy to Bernanke, whose term expires Jan. 31, Yellen supported the central bank's bond-buying programs that have helped propel the S&P 500 up as much as 155 percent from a 12-year low in March 2009.
"The market breathes a sigh of relief with Yellen's appointment," Chris Gaffney, senior market strategist at Everbank Wealth Management, said in an interview from St. Louis. "The markets like the fact that Yellen is a known quantity. She has supported the stimulus program, in fact she's largely thought to be the architect."
Most Fed policy makers said the central bank was likely to reduce the pace of its bond purchases this year, according to minutes released Wednesday of their last meeting, which took place before the government shutdown.
At the Sept. 17-18 gathering, officials unexpectedly maintained the pace of its monthly purchases. That decision pushed the S&P 500 to a record close of 1,725.52. The gauge retreated 4.1 percent through yesterday since then.
"If you read the minutes with blinders on what's going on in Washington, you might think the next meeting in October is on the table for tapering to start, but obviously given what we're dealing with the debt ceiling, that likelihood is extremely thin," Liz Ann Sonders, New York-based chief investment strategist at Charles Schwab, said in a phone interview. Her firm has $2.08 trillion in client assets.
The government shutdown has delayed the release of economic data, including the Labor Department's monthly payrolls report, which was due Oct. 4. The lack of data is making it harder for Fed policy makers to assess the health of the economy as they consider when to start paring unprecedented monetary stimulus. Central bankers next convene Oct. 29-30.
Investors will turn to companies' financial results for clues on the economy's performance, as Alcoa on Tuesday became the first S&P 500 company to report earnings whose fiscal year follows the calendar. JPMorgan Chase & Co. and Wells Fargo & Co. will also report this week.
The Chicago Board Options Exchange Volatility Index, the gauge of S&P 500 options prices known as the VIX, fell 3.6 percent to 19.60 after closing Tuesday at the highest level since Dec. 28.
Investors' appetite for risk has diminished this week. The Nasdaq Internet index, which had risen 52 percent this year through Oct. 4, lost 0.7 percent Wednesday, extending its three-day slide to 6.6 percent. The gauge on Tuesday fell the most in almost two years. Netflix, an online subscription-streaming service that's is still more than three times higher than where it started 2013, dropped 4.6 percent to $288.43, the lowest since Aug. 30.
"Owners of star performers may well head to the exit doors to preserve gains," Michael Purves, head of derivatives research at Weeden & Co., wrote in a note to clients today. "This theme may extend to the broader market itself. Fear momentum takes time to start, but these can be early indications that a fear snowball may well be in the making."
Six of 10 main S&P 500 groups advanced Wednesday. Phone stocks rose 1.3 percent for the biggest gain in a month. Makers of consumer-discretionary products dropped 0.4 percent to lead declines.
AT&T Inc. rallied 1.9 percent, the most in the Dow, to $33.75. The largest U.S. phone company is near an agreement to sell its wireless towers to Crown Castle International, people familiar with the matter said. People with knowledge of the talks said in September the assets could fetch $5 billion.
Alcoa climbed 2 percent to $8.10. The aluminum producer reported better-than-forecast quarterly earnings after its smelting business returned to profitability and results improved at a unit that makes auto and aerospace parts.
Hewlett-Packard rallied 8.9 percent, the most since May 23, to $22.60. Meg Whitman, who enters her third year as CEO, is contending with declining sales from slack demand for personal computers and price cuts in the business-technology market. While analysts are projecting a 3 percent drop in 2014 revenue to $107.6 billion, according to data compiled by Bloomberg, Whitman said she expects "total revenue to stabilize."
Men's Wearhouse jumped 28 percent to $45.03 after Jos. A. Bank Clothiers said it's seeking to buy the apparel retailer for $2.3 billion in cash, or $48 a share. Men's Wearhouse rejected the offer, saying the bid "significantly" undervalued the company and wasn't in the best interest of shareholders. Jos. A. Bank gained 6.4 percent to $44.33.
Yum retreated 6.7 percent to $66.48, the lowest since April 23. The owner of the KFC fast-food chain cut its 2013 earnings forecast as third-quarter earnings trailed analysts' estimates.
Family Dollar Stores dropped 1.1 percent to $68.71. The discount retailer issued a forecast for fiscal 2014 profit that fell short of estimates and reported fourth-quarter revenues and same-store sales that missed forecasts.
Fastenal sank 6.3 percent to $46.85. The largest U.S. retailer of nuts, bolts and other fasteners reported third- quarter revenue and profit that missed analysts' estimates.
With assistance from Bloomberg's Inyoung Hwang in New York.