The Toronto stock market staged a dramatic rebound Tuesday as an emergency rate cut from the U.S. Federal Reserve and a smaller cut by the Bank of Canada persuaded investors to wade back into the market following a five-day tumble.

A sign tells pedestrians to stop in the financial district in Toronto on Tuesday.
(Adrian Wyld/Canadian Press)

The S&P/TSX composite index was up 509 points to 12,641 at the close of trading. Every sector ended the day in positive territory, led by information technology (+3.9 per cent), golds (+7.4 per cent), materials (+8.4 per cent), metals and mining (+5.7 per cent), and financials (+3.7 per cent).

It was a dramatic reversal from the previous four trading days, when the benchmark index tumbled more than 1,500 points amid a global market rout.

Before markets opened Tuesday, the Bank of Canada cut its key lending rate by an expected quarter of a percentage point to four per cent and hinted that more rate cuts are likely.

But it was beaten to the interest rate punch by the U.S. Federal Reserve, which surprised markets with an unscheduled and more dramatic interest rate adjustment — a massive cut of three-quarters of a percentage point.

U.S. stock markets still opened sharply lower Tuesday, catching up to the major losses recorded by stock markets around the world on Monday, but they clawed back much of that early loss as the trading day wore on.

The Dow Jones Industrial Average was down 128 points to close at 11,971, well off its lows. The Dow had tumbled more than 450 points in the first few minutes of trading.

It was the Dow's first close below the 12,000 level since November 2006.

The Nasdaq composite index was down 48 points to 2,293.

Wall Street markets had been closed Monday for the Martin Luther King Jr. holiday.

Trading was volatile Tuesday as markets reacted to the emergency rate cut by the U.S. Federal Reserve. The U.S. central bank slashed its key overnight lending rate to 3.5 per cent.

Despite Tuesday's strong gains for the TSX, several market watchers lowered their market outlooks for the benchmark Toronto index.

CIBC chief economist Jeff Rubin now sees the S&P/TSX composite hitting a mid-year low of just 11,000, followed by a "spirited" recovery to 13,000 by the end of the year. He had previously forecast a year-end figure of 16,200.

"The TSX now faces the prospect of sustained selling pressure over the next quarter and possibly as long as the next six months," he said in a report.

Whatever the future holds, most market watchers expect volatility to be the watchword.

"You have to expect a lot of volatility right now because volatility goes hand in hand with uncertainty, and conditions have rarely been more uncertain than they are right now," said Eric Lascelles, a TD Securities rates strategist.