The stock market finally shook its postelection slump.

Investors seized on hope that Washington will reach a deal on the federal budget and drove stocks Monday to their biggest gain in two months. A pair of strong corporate earnings reports also helped.

The Dow Jones industrial average closed up 207 points, or 1.65 percent. Since President Barack Obama and a divided Congress were returned to power Nov. 6, the Dow had fallen six of eight trading sessions and a total of 650 points.

The president and congressional leaders are in talks to avoid going over a "fiscal cliff" on Jan. 1, when tax increases and mandatory government spending cuts are set to take effect.

While Obama and Republicans appear at odds on whether tax rates for the wealthiest Americans should rise, lawmakers suggested over the weekend that progress is possible.

"I can tell you that the fiscal cliff is focusing the mind," Illinois Sen. Richard Durbin, a Democrat, said on CNN's "State of the Union." He said he had heard from Republicans "the beginning of a negotiation."

Comments like those comforted investors, who are grasping for signs that the negotiations might go somewhere.

advertisement | advertise on newsday

"It is quite clear that both sides want to come to a compromise and that a reasonable compromise is available," David Kelly, chief global strategist for J.P. Morgan Funds, wrote in a note to clients.

Other financial analysts suggested the market's surge may not last. "I don't think anything has changed. It's just the talk from day to day," said Stephen Carl, principal and head equity trader at The Williams Capital Group, an investment bank.

This week's market will be tougher to decipher, Carl said, because volume is increasingly light leading up to the Thanksgiving holiday. Big price swings are more likely when there are fewer buyers and sellers in the market.

The Dow finished up 207.65 points at 12,795.96. The Standard & Poor's 500 index rose 1.99 percent, to 1,386.89. The Nasdaq composite average gained 2.21 percent, to 2,916.07.