Investors have been trying to gauge when the U.S. central bank will start winding down its market-friendly $85 billion monthly bond purchases, with some expecting the Fed to announce a tapering in March.
Stronger economic data of late, including Monday's numbers showing U.S. manufacturing output rose for a fourth straight month in November and last month's payroll report, led some to believe the tapering could come as soon as the Fed's meeting this week.
The Fed has said it will slow the program when certain economic indicators meet its growth targets.
Global manufacturing and business activity expanded in December, as euro zone businesses ended the year on a high thanks to a surge in new orders, though the rate of manufacturing growth slowed in China.
"There are signs of growth here in U.S. is being emulated elsewhere, the recovery is in relatively good footing worldwide and the Fed's decision to eventually start to taper is positive in the long run," said Peter Jankovskis, co-chief investment officer at OakBrook Investments in Lisle, Illinois.
"The market is waiting to see what the Fed is going to decide to do," he said. "Bottom line, the economy continues to show signs of strength and eventually the market will react positively to that."
The Dow Jones industrial average (.DJI) rose 129.21 points or 0.82 percent, to 15,884.57, the S&P 500 (.SPX) gained 11.22 points or 0.63 percent, to 1,786.54 and the Nasdaq Composite (.IXIC) added 28.542 points or 0.71 percent, to 4,029.518.
LSI Corp (LSI.O) was the best performer on the S&P 500 after Avago Technologies (AVGO.O) agreed to buy LSI for $6.6 billion. LSI shares jumped 38.6 percent to $10.96 and Avago added 9.7 percent to $50.10.
In other deal news, AIG Inc (AIG.N) rose 1.1 percent to $50.28 after it said it would sell its aircraft-leasing business to AerCap Holdings NV (AER.N) in a deal valued at about $5.4 billion. AerCap surged 33.1 percent to $33.17.
Exxon Mobil (XOM.N) led points gains on the S&P 500 after Goldman Sachs raised its rating on the stock to "buy" from "neutral," saying the company was nearing a turning point in terms of production growth and capital intensity. Shares added 2 percent to $97.22.
IBM's (IBM.N) 2.9 percent gain to $177.85 made it the top percentage and points gainer on the Dow industrials.
Shares of Herbalife Ltd (HLF.N) jumped 9.4 percent to $74.83 after the company announced there were no material changes to its financial re-audit.
Boeing (BA.N) shares rose 1.7 percent in after-hours trading after it said it approved a $10 billion stock repurchase and raised its dividend 50 percent to 73 cents per share.
Advancers beat decliners on the NYSE by a ratio of 2 to 1. On the Nasdaq, about 15 issues rose for every seven that fell.
About 6 billion shares changed hands on U.S. exchanges, slightly below the 6.1 billion average so far this month, according to data from BATS Global Markets.
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