Aug. 12 (Bloomberg) -- U.S. stocks rose, rebounding from the market’s biggest drop in a month, after the Federal Reserve said the recession is easing and analysts boosted their outlook on insurers. Government bonds fell on the central bank’s plan to slow Treasury purchases as the economy levels out.

Travelers Cos. helped lead insurers higher after its credit outlook was lifted at Standard & Poor’s, while Allstate Corp. jumped 6.3 percent on an upgrade to “buy” at Bank of America Corp. Toll Brothers Inc., the biggest U.S. luxury home builder, gained the most since 2000 after sales topped estimates, while Macy’s Inc. climbed after raising its forecast. VeriSign Inc. rallied as Credit Suisse Group AG recommended the shares.

The S&P 500 added 1.2 percent to 1,005.81 at 4:07 p.m. in New York. The Dow Jones Industrial Average gained 120.16 points, or 1.3 percent, to 9,361.61. The Nasdaq Composite Index increased 1.5 percent to 1,998.72. Equities also advanced after the U.S. trade deficit widened less than forecast.

“It’s reassuring that there were no hidden little Easter eggs in the Fed report, basically it’s coming out as expected,” said Peter Sorrentino, a senior money manager at Huntington Asset Advisors in Cincinnati, which oversees $13.8 billion. “That assuaged a lot of fears.”

Stocks maintained gains, while a drop in Treasuries sent the 10-year note’s yield up 0.04 percentage point to 3.72 percent, as the Fed said it plans to slow the pace of its $300 billion program to buy U.S. bonds and the economy is “leveling out.” The full amount will be purchased by October, the central bank said.

‘Exceptionally Low’

The bond-purchase program was intended to reduce borrowing costs after policy makers lowered their benchmark rate to a record low of zero to 0.25 percent. The Fed maintained that rate target today and said it will stay “exceptionally low” for an “extended period.”

The S&P 500 declined the first two days of this week after it erased 38.2 percent of its tumble from a record in October 2007, a “Fibonacci retracement” to forecasters who base predictions on price charts. Technical analysts argue that stocks often gain momentum or reverse when they reach levels on the Fibonacci sequence, a numerical series based on dimensions found in nature.

“We’re holding right around 1,000, this still is good news,” Jeffrey Kleintop, who helps oversee about $247 billion as chief market strategist at LPL Financial in Boston. “If we can just hold on to this level here, even in the face of these events like the Fed’s statement, it is a good sign.”

Financials Jump

A group of S&P 500 financial shares rallied 2 percent and extended its 2009 advance to 12 percent. Insurance companies jumped 3.7 percent collectively, the steepest advance among 24 groups.

Travelers, the New York-based insurer of cars, homes and businesses, climbed 3.3 percent to $46.43 after S&P said yesterday it may raise its credit rating because of the company’s ability to retain more premium than its rivals after claims and expenses. S&P raised the outlook to “positive” from “stable.”

“The company is maintaining strong capital and liquidity through the difficult market conditions,” S&P analysts Michael Gross and John Iten said in a statement yesterday. Travelers was added to the Dow in June after it surpassed American International Group Inc. in market value.

Allstate was raised to “buy” from “neutral” by Bank of America on speculation the rally in capital markets will boost its investment holdings. The largest publicly traded U.S. home and auto insurer advanced 6.3 percent to $28.42, the biggest gain in a month. Genworth Financial Inc., the life and mortgage insurer that failed to get a U.S. bailout, climbed 5.9 percent.

Toll Brothers Rallies

Toll Brothers rallied after saying third-quarter revenue fell less than analysts had predicted as the cancellation rate declined to the lowest level since the housing slump started in 2006. The shares climbed 14 percent to $23.42.

The ISE Homebuilders Index added 3.7 percent, led by Toll Brothers. Pulte Homes, the U.S. homebuilder that agreed to buy rival Centex, added 4.4 percent. Centex advanced 5.3 percent.

Macy’s, the nation’s second-largest department-store chain, rose 6 percent to $16.40 after lifting its full-year profit forecast and posting second-quarter earnings that beat analysts’ estimates, according to data compiled by Bloomberg. The shares have climbed 58 percent so far this year, compared with an 11 percent gain in the S&P 500.

VeriSign, the biggest operator of computers that direct Web traffic, advanced 3.1 percent to $19.72. Credit Suisse raised its recommendation for the biggest operator of computers that direct Internet traffic to “outperform” from “neutral.”

Earnings Season

Earnings per share topped analysts’ estimates by 11 percent on average for the 453 companies in the S&P 500 that released results since June 17, according to data compiled by Bloomberg. Profits slumped 30 percent in the period, a record eighth straight quarter of falling earnings, and sales slid 16 percent.

Energy companies climbed 1.3 percent collectively. Crude oil for September delivery rose for the first time in five days, advancing 1 percent to settle at $70.16 a barrel. Exxon Mobil Corp. increased 1.4 percent to $69.11. Schlumberger Ltd., the world’s largest oilfield-services provider, rallied 1.9 percent to $53.88.

Applied Materials Inc., the largest maker of semiconductor- production machinery, climbed 3.3 percent to $13.66. The company predicted fourth-quarter sales and profit that topped analysts’ estimates, a sign the chip market may have bottomed out.

Valuation Watch

A 49 percent advance from a 12-year low on March 9 left the S&P 500 trading at 18.6 times the profits of its companies on Aug. 7, the highest valuation since 2004, according to Bloomberg data. The price-to-earnings ratio stood at 18.5 today.

Wagers against the S&P 500 fell to the lowest level since February as investors shorted fewer shares of financial stocks.

Short interest on the S&P 500 declined to 8.77 billion shares as of July 31, a 12 percent decrease from two weeks earlier, according to data compiled by U.S. exchanges and Bloomberg yesterday. That’s the steepest drop since Sept. 30. Investors reduced bearish bets on financial stocks the most, slashing them by 31 percent to 2.05 billion shares.

The U.S. trade deficit widened less than forecast in June, reflecting a second consecutive gain in exports spurred by a pick-up in economies throughout the world. The gap increased 4 percent to $27 billion from $26 billion in May, which was the lowest level in almost a decade, Commerce Department figures showed. Exports gained 2 percent, helped by stronger demand for goods such as semiconductors and aircraft engines, while imports rose 2.3 percent, led by a higher cost for oil.

Recovery Begins

Recovery from the worst recession since the 1930s has begun as President Barack Obama’s fiscal stimulus takes effect, a Bloomberg News survey of economists indicated. The economy will expand 2 percent or more in four straight quarters through June, the first such streak in more than four years, according to the median of 53 forecasts.

Investor sentiment improved around the globe this month, turning bears into bulls in five of the world’s biggest stock markets as earnings and economic data topped estimates. Optimism on U.S. equities climbed the most since April, according to the Bloomberg Professional Confidence Survey. Investors expect equities to rise during the next six months in a record seven countries, with indexes in Brazil, Italy, the U.K., France, Mexico, Japan and Switzerland forecast to advance.

To contact the reporter on this story: Whitney Kisling in New York at wkisling@bloomberg.net.

Last Updated: August 12, 2009 16:31 EDT