June 25 (Bloomberg) -- U.S. stocks advanced the most in three weeks as investors bet that Ben S. Bernanke’s defense of emergency measures to rescue Merrill Lynch & Co. bolstered his chances of remaining Federal Reserve chairman. Oil exceeded $70 a barrel, driving a rally in energy producers.

Stocks also gained as better-than-estimated earnings at Bed Bath & Beyond Inc. lifted retailers and Lennar Corp. pushed homebuilders higher. Bed Bath & Beyond surged 9.5 percent after the largest home-furnishings seller cut expenses to guard against the recession. Lennar rose 18 percent as the homebuilder beat sales estimates. Exxon Mobil Corp. added 2.1 percent.

The Standard & Poor’s 500 Index increased 2.1 percent, the most since June 1, to 920.26 at 4 p.m. in New York. The Dow Jones Industrial Average added 172.54 points, or 2.1 percent, to 8,472.40 as 29 of 30 companies advanced. Equities extended gains after the Treasury sold $27 billion in securities at a lower- than-forecast yield and the Fed curtailed its intervention into financial markets.

“Bernanke is one of the few true heroes of what’s happened in this crisis,” said Michael Holland, who oversees more than $4 billion at Holland & Co. in New York. “If he’s not reappointed that’s a big negative.”

Bernanke said the central bank acted with the “highest integrity” in talks on Bank of America Corp.’s takeover of Merrill Lynch, defending his record against some lawmakers who have alleged officials’ actions were inappropriate. His term expires in January.

Unprecedented Actions

Since becoming chairman in February 2006, Bernanke has made unprecedented use of the Fed’s powers as the lender of last resort to contain the worst erosion of credit since the Great Depression. Bernanke kept banks liquid by accepting bonds they can’t trade as collateral for Treasuries. He bailed out the nation’s biggest insurer and agreed to provide dollars for central banks from Brazil to South Korea to alleviate shortages in emerging markets.

Stocks fell at the start of trading today after the Labor Department said initial claims for unemployment benefits unexpectedly rose last week by 15,000 to 627,000, defying economists’ average estimate of a decrease. Another report showed gross domestic product shrank last quarter at a 5.5 percent pace, slower than the 5.7 percent decrease forecast by economists and previously estimated by the government.

“We’re still on track with the recession ending right here at the end of the second quarter and for positive GDP in the third and fourth,” said Philip Orlando, who helps manage $409 billion as chief equity market strategist at Federated Investors Inc. in New York.

Beating Estimates

Bed Bath & Beyond rallied 9.5 percent to $31.08, its steepest gain since April. Net income increased to 34 cents a share from 30 cents a year earlier. Analysts anticipated earnings of 25 cents a share, according to the average of 18 estimates compiled by Bloomberg.

J.C. Penney Co., the third-biggest U.S. department-store chain, added 6 percent to $28.20. The shares were raised to “overweight” at JPMorgan Chase & Co., which said the company will beat analysts’ earnings estimates on better-than-expected sales and lower costs.

“There’s a sense that the consumer is starting to get better,” said Uri Landesman, who manages $2.5 billion at ING Investment Management Inc. in New York. “There’s still uncertainty about the pace of recovery and the slope of the line. People are changing their minds every day.”

Shoe Sales Fall

Nike Inc. fell 3.3 percent to $51.28. The world’s largest athletic-shoe maker said orders declined 12 percent because of the global economic slump.

Lennar rallied 18 percent to $9.19 for the biggest gain in the S&P 500. The third-largest U.S. homebuilder said deliveries and new orders rose 47 percent and 67 percent, respectively, from the first quarter. The builder also posted second-quarter revenue that exceeded analysts’ estimates.

Home Depot, the biggest home-improvement retailer, advanced 3.9 percent to $23.57.

Exxon added 2.1 percent to $69.88. Crude oil for August delivery rose 2.3 percent to $70.23 a barrel after militants attacked a Royal Dutch Shell Plc pipeline supplying an export terminal in Nigeria, Africa’s largest producer.

Cameron International Corp., the second-largest maker of oilfield equipment, rallied 8.6 percent to $29.02 as Goldman Sachs Group Inc. advised buying the shares.

Beating Estimates

Jefferies Group Inc. increased 6.6 percent to $21.80. The brokerage that specializes in mid-sized companies said it expects second-quarter revenue of more than $500 million. That topped the average analyst estimate of $325.8 million in a Bloomberg survey.

Paychex Inc. slipped 6.2 percent to $25.06 for the biggest loss in the S&P 500. The seller of payroll and human-resource services to small- and medium-size businesses reported fourth- quarter profit that missed analysts’ estimates and said sales in fiscal 2010 will slump at least 10 percent.

Red Hat Inc. lost 4.2 percent to $19.29. The biggest seller of the Linux operating system was cut to “neutral” from “buy” at Bank of America Corp., which cited a slowdown in deferred revenue.

United Parcel Service Inc. led transportation companies 4.6 percent higher for the biggest gain among 24 industries in the S&P 500. The world’s largest package-delivery company rose 3.6 percent to $49.37. Union Pacific Corp., the largest U.S. railroad by market value, rose 5.3 percent to $53.13.

VIX Slumps

The benchmark index for U.S. stock options fell to the lowest since Sept. 12, the last session before Lehman Brothers Holdings Inc. filed for the biggest bankruptcy in U.S. history. The VIX, as the Chicago Board Options Exchange Volatility Index is known, retreated 9.3 percent to 26.36. The index, which measures the cost of using options as insurance against declines in the S&P 500, is down from a record 80.86 in November yet above the 20 average over its 19-year history.

The S&P 500 has rallied 36 percent since dropping to a 12- year low on March 9 on speculation the deterioration in the global economy is slowing. Financials have increased the most of 10 industries, adding 90 percent.

“The recovery trade, which has been reflected in virtually every market, will continue over the next few months,” Larry Kantor, head of research at Barclays Capital Inc. in New York, wrote in a note today. “We anticipate that the U.S. and Europe will show a clear bounce in the second half of the year.”

To contact the reporter on this story: Jeff Kearns in New York at jkearns3@bloomberg.net.

Last Updated: June 25, 2009 16:29 EDT