Nasdaq closes up 2%, Dow adds 400 points as tame inflation data fuels market comeback

Stocks rallied Tuesday, moving closer to last month's record levels following the first of two key U.S. inflation reports this week.

The Dow Jones Industrial Average ended the day up 408 points, or 1.04%, at 39,765.64. The Nasdaq Composite jumped 2.43% to close at 17,187.61, while the S&P 500 added 1.68% to 5,434.43. The broad market index is now roughly less than 5% from its record high from July.

The producer price index — a measure of wholesale prices — increased 0.1% last month. Economists expected the reading to show a monthly gain of 0.2% in July, in line with the previous month's reading, according to Dow Jones consensus estimates.

The PPI encouraged investors ahead of the more widely followed consumer price index out Wednesday morning, which is expected to show an increase of 0.2% month over month, up from a 0.1% decline in the prior month. The data could give an uncertain market some direction after last week's wild moves.

"Today's PPI data gives further evidence that the tide has turned on inflation, especially in services," said David Russell, global head of market strategy at TradeStation. "[I]nvestors who dumped stocks recently expecting lower prices might be frustrated. The other shoe isn't dropping."

Tuesday's rally added to the strong gains seen late last week, with the market further recovering from the steep Aug. 5 sell-off. Since that close, the S&P 500 has popped 4.2%.

Volatility has also eased sharply since then. The Cboe Volatility Index (VIX) hovered below 20 on Tuesday after surging above 65 last week.

Starbucks surged 24.5% after the coffee chain tapped current Chipotle chief executive Brian Niccol as its next CEO. Shares of Chipotle sank 7.5%.

Stocks closed higher on Tuesday, with the Dow Jones