But investors questioned that bleak outlook Tuesday after a manufacturing survey from the Federal Reserve Bank of Richmond, Va., pointed to an economic slowdown, not a recession.
"And when people are preparing for a recession, slow growth is good right now," Paulsen said.
The Dow closed with a gain of 322.11, or 2.97 percent, at 11,176.76. Indexes that track smaller stocks did even better, a sign that investors were more willing to take on risk.
The S&P 500 index rose 38.53 points, or 3.4 percent, to 1,162.35. The Nasdaq composite, which tracks mainly technology companies, rose 100.68 points, or 4.3 percent, to 2,446.06. The Russell 2000 index of smaller U.S. companies gained even more, 4.9 percent.
Exxon Mobil Corp. rose the most of the 30 stocks in the Dow, 5.0 percent. Chevron Corp. was up more than 4.3 percent. Energy stocks got a push from a slight increase in the price of oil, to $85.44 a barrel. The dollar fell against the euro and Japanese yen as investors moved money into riskier assets.
Bank of America Corp. lost the most of any Dow stock, 1.9 percent. The stock is down 35 percent this month as investors become increasingly worried about the bank's ability to raise capital and its liabilities related to subprime mortgages. The latest disappointment came Monday with news that BofA will not sell all of its 10 percent stake in China Construction Bank.
Indexes eked out minor gains Monday following a four-week losing streak. During that time there were four days in a row in which the Dow Jones industrial average moved by at least 400 points, the first time that has happened in the Dow's 115-year history.
One measure of the market's swings, the Chicago Board of Options Exchange's volatility index, is up 44 percent this month. That's a sign investors are anticipating more wide swings in the S&P 500.
The index fell 15 percent Tuesday as concerns about future turbulence eased.
Investors will be watching Federal Reserve Chairman Ben S. Bernanke's speech at the central bank's annual retreat in Jackson Hole, Wyo., on Friday. It was at the same conference a year ago that Bernanke made the case for buying Treasury bonds to push interest rates lower and spur spending. That $600 billion bond-buying program was credited with giving stock markets a lift, but it ended in June.
Five stocks rose for every one that fell on the New York Stock Exchange. Trading volume was higher than average at 5.2 billion shares.
