The market is coming off its best weekly performance since the week ending January 2, spurred by hopes that the economy will be healed by a giant economic stimulus plan and a separate banking stabilisation plan in the works by President Barack Obama's administration.
The Dow Jones Industrial Average rallied 3.5 per cent in the week to Friday to 8,280.59 and the tech-heavy Nasdaq vaulted 7.8 per cent to 1,591.71.
The broad-market Standard & Poor's 500 jumped 5.17 per cent to 868.60.
The market was able to shrug off the latest grim economic data that showed 598,000 jobs lost in January and the unemployment rate at a 16-year high of 7.6 per cent.
The gains were "due to the expectations that we are going to get a massive stimulus package," said Lindsay Piegza at FTN Financial.
"There is a lot of optimism in the market in terms of government policies and in government funding coming in and boosting the economy," Piegza said.
Some investors took comfort in data showing a slower pace of contraction in both the manufacturing and service sectors, offering a hint of a bottoming in the economic crisis.
Analysts expect an economic stimulus to emerge from Congress that will help consumers and business recover from the horrific slump.
"A plan, even if not the best one, will help boost confidence that the economy will recover sooner rather than later," said Al Goldman at Wachovia Securities.
"The new package will provide some tax relief for middle-income families via payroll tax cuts, which will go into effect almost immediately," said economist Diane Swonk at Mesirow Financial.
"The package also has some tax incentives to buy homes and autos, which could spur some demand in our hardest-hit industries. Tax cuts for businesses should help mitigate the magnitude of job losses in the second quarter."
Avery Shenfeld, senior economist at CBIC World Markets, said the other key element is a banking stabilization plan expected Monday from US Treasury Secretary Timothy Geithner.
"While the banking plan is unlikely to leave anything more than crumbs for shareholders of institutions needing the greatest relief, it's a key step in restoring confidence for their credits and lending capacity for the economy," Shenfeld said.
"These announcements will overshadow more bad news from retailers and exporters."
Paradoxically, data showing the crisis intensifying raised some hopes the economic crisis will end sometime this year.
"Sharp recessions tend to have sharp recoveries, that's the good news," said Robert Brusca at FAO Economics.
"I see some evidence that the severe phase of the cycle is playing out. Once we turn the corner, growth can return faster than most are saying."
Josh Heller at RBC Economics Research said there could be more pain but that a recovery is at least in sight.
"Going forward, we expect the US economy to continue contracting through the first half of 2009," he said.
"US growth should, however, turn positive in the second half of this year, spurred by expansionary fiscal and monetary policy."
Investor confidence remains fragile, but some say the long slump has primed the market for a possible rally phase.
"We have noted many times lately that the market seemed to be positioned to launch at least a moderate relief rally and maybe something more," said Gregory Drahuschak, analyst at Janney Montgomery Scott.
But he said the latest rally may have already been in anticipation of the new plan, citing the Wall Street adage of "buy the rumor and sell the news."
"If the market can shake off the tendency to take profits, another buying wave could evolve, which could be more aggressive than the initial upside was," he added.
Bonds fell. The yield on the 10-year Treasury bond increased to 2.979 per cent from 2.844 per cent a week earlier, and that on the 30-year bond climbed to 3.683 per cent from 3.603 per cent. Bond yields and prices move in opposite directions.