The Dow Jones industrial average surged more than 429 points, its tenth-highest point gain in history and the biggest since March 2009. It was just one day after the Dow had its worst point decline since 2008.
The Federal Reserve pledged to keep its key interest rate at its record low of nearly zero through the middle of 2013. The central bank also said that it has discussed "the range of policy tools" it can use to spur the economy.
Bob Doll, chief equity strategist at BlackRock, said the Fed's decision to hold interest rates at a very low rate for two years is "unprecedented" and called it a kind of "backdoor quantitative easing." In June, the central bank finished a second round of buying Treasury securities, also known as quantitative easing, in hopes of boosting the economy.
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"Markets are going to do what they would have done if the Fed went out and bought securities," Doll said. He said he expects investors will return to stocks after the broad sell-off of the least few weeks.
He expects stocks to continue to rally because a slow-growing US economy won't harm corporate profits. As a whole, the companies in the Standard & Poor's 500 index reap more than half their revenue overseas. What's more, companies have already cut costs significantly, have hoarded cash and squeezed more production out of workers. Even as the US economy has slowed, the S&P 500 as a whole was expected to earn record profits this year.
"Corporate America has demonstrated that it can generate good growth and profits despite a weaker US economy," Doll said.
The Dow rose 429.92 points, or 4 per cent, to 11,239.77. On Monday, the Dow plunged 634.76 points in the first trading day after Standard & Poor's downgraded the US one notch from its top AAA credit rating to AA+.
The S&P 500 rose 53.07, or 4.7 per cent, to 1,172.53. The Nasdaq composite index rose 124.83, or 5.3 per cent, to 2,482.52.
The rally spread to overseas markets early on Tuesday. Japan's benchmark Nikkei 225 index was up about 1.4 per cent, while Hong Kong's Hang Seng index added 3 per cent. Australia's benchmark S&P/ASX200 index rose 3 per cent.
At first, US markets reacted much differently to the Fed's statement. Stocks fell as much as 205 points after the Fed's 2:15 p.m. EDT (1915 GMT) statement.
Gold surged more than $50 per ounce to $1,774. The yield on the 10-year Treasury note briefly touched a record low of 2.03 percent, after closing Monday at 2.34 per cent.
An hour later with less than 45 minutes until the market closed, stocks rallied, gold retreated off its high and the yield on the 10-year Treasury note quickly headed higher. It was at 2.26 per cent late Tuesday. A bond's yield drops when its price rises.
Howard Silverblatt, senior index analyst at S&P, called it the "Big Ben turnaround," referring to Fed chair Ben Bernanke.
The industries that did best on Tuesday were the ones that fell the most on Monday. Financial stocks in the S&P 500 rose 8.2 per cent after falling 10 per cent Monday. Materials companies, which rely on a stronger global economy for their profits, rose 5.9 percent.
Only seven of the 500 stocks in the index had declines. All 30 stocks in the Dow rose. Bank of America Corp., which was down more than 20 per cent on Monday, rose 16.7 per cent, the most of any stock in the Dow. Aluminium maker Alcoa Inc. was up 8 per cent.
Technology company MEMC Electronic Materials Inc. led the S&P 500 higher, gaining 19.1 per cent.