Jan. 31 (Bloomberg) -- U.S. stocks rallied, sparing the Standard & Poor's 500 Index from its worst January ever, after the world's largest bond insurer said it expects to keep its AAA credit rating.

Benchmark indexes rebounded from losses after MBIA Inc. Chief Executive Officer Gary Dunton's comments sparked a rally in bank shares. Home Depot Inc. helped lead the Dow Jones Industrial Average to a 208-point gain after Deutsche Bank AG said shoppers will spend more as interest rates fall and the government mails out tax rebates. Pulte Homes Inc. pushed builders to a four-month high after forecasting a narrower loss than analysts estimated.

The S&P 500 added 22.69 points, or 1.7 percent, to 1,378.5, reversing an earlier 1.6 percent drop spurred by a steeper-than- forecast increase in jobless claims. The Dow gained 1.7 percent to 12,650.36. The Nasdaq Composite Index climbed 40.86, or 1.7 percent, to 2,389.86. Four stocks rose for every one that fell on the New York Stock Exchange.

``The fears that were out there have been allayed somewhat,'' said Walter ``Bucky'' Hellwig, who helps oversee about $30 billion at Morgan Asset Management in Birmingham, Alabama. ``Money's going to work in these oversold sectors like financials and consumer discretionary.''

Financial companies and makers of discretionary consumer goods, last year's worst-performing industries, led the market's advance. MBIA's conference call boosted speculation that bond insurers will maintain the top credit ratings they rely on to guarantee $2.4 trillion in securities. Concern that the ratings were in jeopardy helped erase gains yesterday that were sparked by the Federal Reserve's second interest-rate cut in nine days.

January Barometer

Before the call, the S&P 500 had extended its January tumble to 9.1 percent, which would have been the biggest in the 80-year history of the index.

The benchmark still lost 6.1 percent this month, the worst start to a year since 1990. The so-called January Barometer holds that the first month determines if stocks rise or fall for the year. The indicator, devised in 1972 by Yale Hirsch, proved wrong in 2001, 2003 and 2005. Still, it's been 75 percent accurate since 1950, according to the Stock Trader's Almanac.

MBIA added $1.54, or 11 percent, to $15.50 after Dunton said the insurer has more than enough capital to keep its AAA credit rating and dismissed speculation the company may go bankrupt. He blamed ``fear mongering'' and ``distortion'' for driving the company's stock down more than 80 percent in the past year.

MBIA, FGIC

MBIA fell 15 percent earlier today after the posting a record fourth-quarter net loss of $2.3 billion, or $18.61 a share. The loss came a day after FGIC Corp.'s insurance unit was stripped of its AAA grade by Fitch Ratings. Without a top credit rating, MBIA's business would be crippled and throw ratings into doubt on $652 billion of securities it insures.

Ambac Financial Group Inc. gained 79 cents, or 7.3 percent, to $11.64, erasing an 11 percent drop. Citigroup Inc. analysts said the second-largest bond insurer and MBIA may weather competition from Warren Buffett's Berkshire Hathaway Inc., which is entering the municipal bond-insurance market. The analysts increased their share-price estimate by 71 percent to $12.

Earlier declines in financial shares were also spurred by an S&P report that losses from securities linked to subprime mortgages may exceed $265 billion as financial institutions write down the value of their holdings.

Citigroup, the nation's largest bank by assets, increased 61 cents to $28.17 after earlier falling as much as 4 percent. Lehman Brothers Holdings Inc., the fourth-biggest U.S. securities firm, recovered from a 3.8 percent loss, climbing $1.46 to $64.05.

MasterCard Earnings

Bond insurers guarantee $2.4 trillion of debt and are sitting on losses of as much as $41 billion, according to JPMorgan Chase & Co. analysts. Their downgrades would force banks to write down $70 billion, Oppenheimer & Co. analyst Meredith Whitney wrote in a report this week.

MasterCard Inc. helped boost consumer-finance companies after the second-biggest card network said fourth-quarter profit climbed sevenfold as U.S. consumers spent more on gas and food. MasterCard shares jumped $18 to $207. American Express Co., the third-largest U.S. credit-card network, rose $1.79 to $49.13. Discover Financial Services, the credit-card company spun off by Morgan Stanley, increased $1.19 to $17.49.

Home Depot, the world's largest home-improvement chain, added $1.26 to $30.64 and led the S&P 500 Retailing Index to a 4.4 percent advance. The gauge has rallied 3.3 percent this month after tumbling 18 percent in 2007, the biggest yearly decline since 2002. Deutsche Bank raised its rating for U.S. chain stores, saying merchants will benefit from a fiscal stimulus package and interest-rate cuts in the next six months.

`Anticipation of a Recovery'

The U.S. House approved a $146 billion economic stimulus plan this week aimed at averting a recession in part by sending tax-rebate checks to about 111 million Americans.

Home Depot said today it cut 10 percent of the workforce at its Atlanta headquarters, or 500 employees, to focus on its stores as the housing market continues to weaken.

``It's interesting to see financials and consumer names doing OK,'' said Steven Neimeth, a Jersey City, New Jersey-based portfolio manager at SunAmerica Asset Management Corp., which oversees $56 billion. ``They may be reflecting investors' anticipation of a recovery later this year.''

Homebuilders Rally

Pulte Homes Inc. led a 9.6 percent gain among homebuilders in S&P indexes after predicting a smaller first-quarter loss than analysts' estimated. The builder of Del Webb-brand homes for retirees also reported fourth-quarter revenue that topped estimates. Pulte shares climbed $2.78, or 20 percent, to $16.35. The stock has rallied 55 percent this year, the best gain in the S&P 500, after retreating 68 percent in 2007.

Lennar Corp., a Miami-based builder, added $2.34 to $20.54. KB Home increased $2.32 to $27.50.

The S&P 500 fell as much as 1.6 percent today after the Labor Department said the number of Americans filing first-time claims for unemployment benefits rose more than forecast to 375,000 last week, a 27-month high.

Energy shares led the market's early declines after prices for crude oil, gasoline and heating oil fell and earnings reports from Marathon Oil Corp., Cameron International Corp. and Tesoro Corp. disappointed investors. The S&P 500 Energy Index ended the day up 0.3 percent, pushed higher by Exxon Mobil Corp.

Marathon Oil, the largest refiner in the U.S. Midwest, dropped $3.84 to $47.07 after reporting profit excluding some items that trailed analysts' estimates on narrower refining margins for gasoline and diesel. Tesoro, the largest refiner in the western U.S., fell $1.50 to $38.90 on a fourth-quarter loss that was larger than some analysts estimated.

Cameron, Peabody

Cameron, the second-largest U.S. maker of oilfield equipment by market value, declined $3.14 to $39.92 after forecasting lower 2008 earnings than analysts estimated. Peabody Energy Corp., the largest U.S. coal producer, retreated $1.52 to $53.86 after fourth-quarter profit dropped 80 percent.

The Chicago Board Options Exchange Volatility Index, a gauge of S&P 500 options prices, fell 5.1 percent to 26.20 after gaining as much as 4.3 percent earlier today.

The Dow average rose as much as 452 points from its low to its high, the biggest move since a 631-point swing on Jan. 23.

Consumer spending in the U.S. rose 0.2 percent in December, the slowest pace in six months, after a 1 percent gain the month before, the Commerce Department said. Economists had forecast a 0.1 percent increase in spending, according to a Bloomberg News survey. The report also showed that incomes rose 0.5 percent after a 0.4 percent gain the prior month.

Fed Bets

The National Association of Purchasing Management-Chicago's business barometer fell to 51.5 from 56.4 a month earlier. Figures greater than 50 signal growth.

The Federal Reserve lowered its benchmark interest rate yesterday by half a percentage point to 3 percent following a 0.75 percentage point reduction on Jan. 22. The central bank indicated its willingness to do so again to prevent a U.S. recession. The S&P 500 climbed as much as 1.7 percent yesterday following the Fed's cut. The index erased its gain and fell 0.5 percent after Fitch revoked its top ranking on Financial Guaranty Insurance Co.

The S&P 500 fell from its highs today in the final minutes of regular NYSE trading after S&P cut its rating on Financial Guaranty, the world's fourth-largest bond insurer.

Traders see a 72 percent chance the central bank will lower its target for the overnight lending rate between banks by 0.5 percentage point to 2.5 percent by its March 18 policy meeting, according to Fed funds futures. That compares with 40 percent odds yesterday and no chance a week ago. The rest of the bets are for a quarter-point reduction.

Monthly Performance

All 10 industries in the S&P 500 fell this month as concern increased that the housing slump, a weakening job market and tighter bank lending will restrain consumer spending and drag the world's largest economy into a recession. Technology and energy companies were the worst performers, declining 13 percent and 11 percent, respectively.

Apple Inc. led the losses in technology shares after Chief Executive Officer Steve Jobs spooked investors with a disappointing forecast. The maker of the Macintosh computer and iPod media player has dropped 32 percent this year after more than doubling in 2007. Apple gained $3.18 to $135.36 today.

Exxon and Chevron Corp. dropped 7.8 percent and 11 percent this month, respectively, as crude oil prices retreated from a record on concern growth will slow in the U.S., the world's biggest energy consumer.

Financials Valuation

Financial firms fell the least among 10 industry groups this year after the price-to-earnings ratio on the S&P 500 Financials Index declined this month to 10.4, the lowest since Bloomberg began tracking the daily data in 1995.

Washington Mutual Inc. was the best performing stock in the index amid speculation the largest U.S. savings and loan will be acquired. The shares rallied 46 percent this year, rebounding from a 70 percent decline last year spurred by the declining value of its home mortgage unit and rising loan losses. The shares rose $1.22 to $19.87 today.

Google Inc. climbed $16.03 to $564.30. After the close of regular U.S. trading, the most popular Internet search engine reported profit and sales that trailed analysts' estimates, signaling that an economic slowdown may be cutting into online advertising. The shares lost 7.1 percent to $524.30 in after- hours trading as of 6:04 p.m. in New York.

The Russell 2000 Index rose 2.6 percent to 713.30 after JPMorgan said the measure of small U.S. companies will surge because its members are cheap and investors are too pessimistic. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, gained 1.8 percent to 13,896.65. Based on its advance, the value of stocks increased by $300 billion.

European stocks fell today, capping the worst-ever January for the Dow Jones Stoxx 600 Index. Financial firms including France's Credit Agricole SA and Belgium's KBC Group NV led the declines. Asian stocks rose today on speculation earnings will withstand a slowdown in the U.S. The MSCI Asia Pacific Index gained 1.7 percent, trimming its January decline to 9 percent.

To contact the reporter on this story: Michael Patterson in New York at mpatterson10@bloomberg.net.

Last Updated: January 31, 2008 18:08 EST