Jan. 21 (Bloomberg) -- U.S. stocks surged as President Barack Obama’s plan to shore up lenders and Bank of America Corp. share purchases by company executives sent financial equities to their biggest rally in two months.

Bank of America jumped 31 percent, the most since at least 1980, after Chief Executive Officer Kenneth Lewis and five directors bought shares. Citigroup Inc. and JPMorgan Chase & Co. rallied more than 25 percent, helping the S&P 500 Financials Index rebound from its lowest level since 1995 with a 15 percent gain. International Business Machines Corp. climbed 12 percent on a 2009 profit forecast that topped analysts’ estimates.

“As volatile and treacherous as the waters are, the storm will pass,” said Michael Williams, who helps oversee more than $2 billion as chief executive officer of Genesis Asset Management in New York. “In order to get the deals, you have to be willing to step into the waters when it’s awfully ugly.”

The Standard & Poor’s 500 Index rose 4.4 percent to 840.24, its steepest gain since Dec. 16. The Dow Jones Industrial Average added 279.01 points, or 3.5 percent, to 8,228.1. The Russell 2000 Index climbed 5.3 percent.

With today’s advance, the S&P 500 pared its decline this month to less than 7 percent, still the benchmark index’s second-worst start after last year’s 9.8 percent drop during the first 13 trading days. U.S. stocks sank yesterday, sending the Dow average to its biggest Inauguration Day decline, as speculation banks must raise more capital pushed financial shares down 17 percent.

VIX Tumbles

The benchmark index for U.S. stock options fell the most since October, reflecting lower prices for contracts used to hedge against declines in the S&P 500. The VIX, as the Chicago Board Options Exchange Volatility Index is known, retreated 18 percent to 46.42.

Europe’s Dow Jones Stoxx 600 Index dropped 0.6 percent, while the MSCI Asia Pacific Index slid 0.7 percent.

Treasuries fell on concern debt sales will increase as Obama called on Americans to rebuild the economy. The new president’s economics team is pushing to complete a bank-rescue plan that can be twinned with the $825 billion stimulus package being negotiated with Congress to alleviate the deepening financial crisis.

‘Comprehensive Plan’

While full details of the rescue haven’t been settled yet, people familiar with the deliberations said the package is likely to include a $50 billion-plus program to stem foreclosures, fresh injections of capital into banks and steps to deal with toxic assets clogging lenders’ balance sheets.

Timothy Geithner, Obama’s nominee for Treasury Secretary, told Congress that the president plans within the next few weeks to propose a “comprehensive plan” for responding to the economic and financial crises.

“Our guess is by the year-end, that the reflation going on with the monetary policy, the fiscal policy, the decline in the price of oil, all that reflation will overcome the deflationary forces, and we’ll have a somewhat higher market,” Robert Doll, who oversees about $300 billion as chief investment officer for global equities at BlackRock Inc., told Bloomberg Television.

Bank of America rose $1.58 to $6.68, rebounding from its lowest close in 18 years. Lewis bought 200,000 shares of the bank yesterday at prices ranging from $5.98 to $6.06, while five directors bought a total of more than 300,000 shares, according to filings with the Securities and Exchange Commission.

Citigroup, the U.S. bank that received a government-backed capital injection of $20 billion in November, surged 31 percent to $3.67 after closing at a 17-year low yesterday. The shares rose even as Citigroup lowered its quarterly dividend to a penny a share from 16 cents to comply with the terms of the bailout.

‘Not Diseased’

JPMorgan Chase & Co. advanced 25 percent to $22.63. Chief Executive Officer Jamie Dimon bought 500,000 shares of JPMorgan yesterday, according to an SEC filing after the market closed. The stock climbed another 5.2 percent in extended trading.

“There is going to be a banking system that survives,” said Matthew Kaufler, portfolio manager at Federated Clover Investment Advisors in Rochester, New York. “There are institutions that are not diseased, that while they might require additional capital to get through this period, are going to survive and prosper again.” Federated Clover manages $2.1 billion.

PNC Financial Services Group Inc. added 37 percent to $30.16 for the biggest gain in the S&P 500. The fifth-largest U.S. bank by deposits said it won’t sell new stock despite a fourth-quarter loss resulting from its purchase of National City Corp.

Northern Trust, U.S. Bancorp

Northern Trust Corp. rose 31 percent to $57.51. The Chicago-based custody bank’s fourth-quarter operating earnings rose 48 percent on record foreign-exchange trading income.

U.S. Bancorp recovered from a drop of as much as 23 percent and added 4.9 percent to $16.09. The bank that acquired failed lenders Downey Financial Corp. and PFF Bancorp Inc. said fourth- quarter profit plunged 65 percent on impairments from investments and setting aside more money against bad debt.

IBM added $9.44 to $91.42. The biggest computer-services provider posted fourth-quarter profit of $4.43 billion, or $3.28 a share, surpassing analysts’ estimates, as the top provider of computer services coped with a worldwide technology slump by cutting overhead costs and adding products.

Wal-Mart Stores Inc. declined 2.8 percent to $49.14 and was the biggest drag on the Dow average. The world’s largest retailer and the fifth-best performing stock in the S&P 500 last year was cut to “neutral” from “outperform” at Credit Suisse Group AG, which said “waning inflation and slowing square footage growth should pressure sales growth.”

Coach Inc., the largest U.S. maker of luxury leather handbags, slid 7.3 percent to $14.72 for the biggest drop in the S&P 500. Fiscal second-quarter profit declined 14 percent as the company didn’t match rivals in cutting prices to lure customers.

Allegheny Technologies Inc. fell 6.8 percent to $22.46. The specialty-metals producer that supplies titanium to Boeing Co. said fourth-quarter profit declined 26 percent because of an “unprecedented” fall in demand in several key markets.

To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net

Last Updated: January 21, 2009 16:52 EST