NEW YORK (Bloomberg) - US stocks gained, recovering yesterday's losses, on speculation President-elect Barack Obama's $775 billion package of tax cuts and government spending will revive the economy.

Walt Disney Co., Hewlett-Packard Co. and Citigroup Inc. rose more than 3.4 percent on expectations consumer spending will be bolstered by Obama's plan for tax breaks worth $500 to individuals. Ciena Corp. advanced 19 percent, the most since 2004, and led a rally in technology shares after the maker of network equipment was upgraded at Barclays plc. on growth prospects.

"It creates short-term benefits because consumers will spend more," Ron Sweet, vice-president of equity investments at USAA Investment Management Co., which oversees about $100 billion in San Antonio, said of Obama's plan. "There's relief that the government isn't just going to let everything fall apart."

The Standard & Poor's 500 Index rose 0.8 percent to 934.69, rebounding from Monday's 0.5 percent drop and climbing to the highest since November 5. The index is up 3.5 percent in 2009 after sliding 38 percent in 2008, its worst yearly loss since 1937. The Dow Jones Industrial Average increased 62.21 points, or 0.7 percent, to 9,015.1. The Russell 2000 Index added 1.9 percent.

The S&P 500 has jumped 24 percent from an 11-year low on November 20 amid optimism that Obama will boost the economy with tax cuts and the largest infrastructure investment since the 1950s. The gains also came after the Federal Reserve slashed interest rates to as low as zero, while the European Central Bank also has scope to reduce borrowing costs further after the region's inflation rate fell to the lowest in more than two years.

Disney, the largest theme-park operator, increased 3.5 percent to $24.31. Hewlett-Packard climbed 8.2 percent to $39.31 for the top gain in the Dow. Citigroup added 5.4 percent to $7.46.

Ciena advanced $1.32 to $8.40 and led a group of technology shares to a three percent gain, the most among 10 industries in the S&P 500. Barclays analysts lifted their recommendation on the stock to "overweight" from "equal weight" because it offers "healthy long term growth potential" at "modest valuation".

Dow Chemical Co. rallied $1, or 6.6 percent, to $16.05. The largest US chemical maker said it plans to seek more than $2.5 billion from Kuwait for canceling a joint venture agreement and will consider a new partner to invest in its basic-plastics business.

The advance in stocks came after Obama told House Speaker Nancy Pelosi he favors a price tag of about $775 billion for the US economic stimulus plan, according to a Democratic aide.

US construction companies and investment banks will be among the prime beneficiaries of business tax cuts proposed by Obama, the Wall Street Journal said. Proposals being drafted by congressional Democrats and the incoming administration would allow companies to use tax losses to reduce taxable US profit earned in the last five years, the newspaper said.

"It's hard not to be positive given how much stimulus is coming through the pipe," Jason Pride, research director for Haverford Trust Co., which oversees $5.5 billion in Haverford, Pennsylvania, told Bloomberg Television. "In the back half of '09, we do expect some form of recovery."

Stocks rose even after reports showed the US economy ended the year in a steep decline, with factory orders, home sales and service industries all contracting further.

The Institute for Supply Management's index of service businesses was 40.6 for December, a higher-than-forecast reading that was still the second-worst on record. The National Association of Realtors index of pending home resales fell four percent in November, and the Commerce Department said orders at US factories slumped for a fourth month.

Sales at retail stores open at least a year dropped 0.8 percent in the seven days through January 3, the International Council of Shopping Centers and Goldman Sachs Group Inc. said.

Investors should favour US companies that generate most of their revenue at home rather than in Western Europe, Goldman Sachs Group Inc. said in a note. The brokerage has an "overweight" recommendation on the consumer-staples and health-care industries.

"The S&P 500 will begin to trade meaningfully higher once we pass four critical milestones," Goldman Sach's New York-based strategist David Kostin wrote.

"Passage of a fiscal stimulus plan in the first quarter, improved access to credit for corporations and consumers, home price stabilisation and declines in financial writedowns."