So much for the theory that stocks don't react to macroeconomic events. Crude oil took one of its steepest one-day dives ever Wednesday, dropping more than 7% and sending stocks to some of their biggest gains of the year. Signs of economic strength in income, manufacturing and

Federal Reserve

survey data added to the rally.

The

S&P 500

gained 1.5% to close at 1191.35, above the three-year high reached last month, while the

Nasdaq Composite

rose 2% to 2138.23, the highest since Jan. 26. The

Dow Jones Industrial Average

added 1.6% to 10,589.70.

Gains were widespread and led by rising shares of retailers, airlines, semiconductors and computer makers. Among the standouts:

Southwest Airlines

(LUV) - Get Report

gained 4%,

TJX

(TJX) - Get Report

added 3% and

Applied Materials

(AMAT) - Get Report

rose 6%. The Philadelphia Stock Exchange Semiconductor Index gained almost 4%.

The energy patch, not surprisingly, was the only point of weakness.

Occidental Petroleum

(OXY) - Get Report

lost 2% and

Schlumberger

(SLB) - Get Report

dropped 3%; the Amex Oil & Gas Index fell 1.9% and the Philadelphia Stock Exchange Oil Service Index fell 3.9%.

Oil's crash came as the U.S. Energy Department reported that stockpiles of crude and distillates such as heating oil were much higher than expected. Crude inventories gained about one-third of 1% on the week and were at the highest level since early August, while distillates added more than 2% ahead of the winter fuel season.

Other data helping feed the rally included a stronger-than-expected 0.6% jump in personal income in October. Consumption by consumers outpaced income, rising 0.7%, while a measure of inflation included in the report -- the PCE deflator index -- rose 0.4%. The markets also got a bigger-than-forecast gain in the ISM index of manufacturing activity. New orders and employment rose while prices paid fell. Finally, the Fed's beige book survey of business activity for last month showed continued growth around the country.

The combination of plummeting crude oil prices and strong data was enough to light a fire under stocks and lock in the Fed's next rate increase, barring a surprise employment drop in Friday's payrolls report.

Low End Squeeze

Following Tuesday's divergence in consumer confidence trends along socioeconomic lines, the beige book survey found the same split in consumer spending. Regional banks based in Dallas, Kansas City and New York said "demand for premium merchandise has been noticeably stronger than that for lower-priced lines, with some contacts suggesting that lower-income households might have been more greatly affected by high energy prices."

The implication, of course, is that customers of

Wal-Mart

(WMT) - Get Report

and

Sears

(S) - Get Report

are under pressure while

Saks

(SKS)

and

Neiman Marcus

(NMGA)

shoppers party on.

The beige book also indicated some early signs of bubbling inflation. "Increased cost pressures were reported by firms across the country, particularly for energy, transportation, food and petroleum-based products," the Fed noted. "While competition limited the ability of producers to pass higher costs forward, several Districts noted that some industries were successful in passing along cost increases."

All the signs of growth helped torpedo bonds on Wednesday. The yield on the 10-year Treasury note rose to almost 4.38% from 4.36% on Tuesday.

Manufacturers were more successful than retailers at passing through price hikes. Automobile dealers and makers of tech goods were seen cutting prices and enhancing discounts.

Will Google Save the Streak?

Sprinting to the finish,

(LMVTX) - Get Report

Legg Mason Value Trust manager Bill Miller is closing the gap in his attempt to attain a 14th straight year of beating the S&P 500. As of the close on Tuesday, Miller's fund had gained 5.54% in 2004, trailing the S&P by exactly 1.5%, having cut the gap in half over the past two months.

Leading the charge for Miller has been his position in

Google

(GOOG) - Get Report

, bought at the firm's IPO and up more than 100% since then.

Nextel

(NXTL)

,

Fannie Mae

(FNM)

and

AES

(AES) - Get Report

also have added to the fund's gains in the rally. On Wednesday, Google lost 1.1%, Nextel gained 3.5%, Fannie rose 4.4% and AES added 0.7%.

As to Miller's laggards, he's still sticking with them in the

latest commentary, which was posted on Wednesday and is dated Nov. 8.

In one case, that's worked out well.

Amazon.com

(AMZN) - Get Report

has finally turned up, rising from under $35 to almost $40 last month. It added 0.8% to close at $39.98 on Wednesday.

"What some investors are interpreting as a substantial slowdown in top line growth is, in fact, simply a reflection of management's conservatism," he writes. "When discussing third-quarter results last year, management made similarly conservative sales growth projections for 2004, only to raise guidance substantially following this year's first quarter."

Countrywide Financial

(CFC)

, another big position Miller defends, hasn't turned the corner. The mortgage lender was -- in theory -- supposed to be able to offset declining borrowing demand with increasing revenue from its rights to collect service fees on prior loans. When the company reported results in October, loan demand dipped but service rights didn't pick up the slack and the stock dropped from $38 to less than $32. It was back up to $34.11 by Wednesday's close.

Again, Miller says it's all a big misunderstanding. "The decline is an overreaction and represents a buying opportunity for investors who understand that -- because of the way in which mortgage servicing rights are amortized --there is a one- or two-quarter lag between the time loan originations slow down and servicing income picks up," Miller writes.

He also defends his bets on

Kodak

(EK)

,

UnitedHealth Group

(UNH) - Get Report

and

DirecTV

(DTV)

.

Can Value Trust overtake the S&P, making proponents of the efficient market theory shiver, yet again? Time will tell, but it may depend whether shares of Google stay airborne and on just how many holiday shoppers turn to Amazon.

In keeping with TSC's editorial policy, Pressman doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send

your feedback.