NEW YORK  In a sign that fears of a financial catastrophe are waning, the stock market rallied 3.6% Tuesday — its best second-quarter start in 70 years.

A day after wrapping up its worst quarterly performance in 5½ years, stocks got a big confidence boost from investment bank Lehman Bros., (LEH) which successfully raised $4 billion in capital. The move bolstered Lehman's balance sheet and sent a strong message to jittery investors that the firm was financially sound and not likely to experience the same fate as investment firm Bear Stearns, which collapsed two weeks ago.

"Stocks rallied because some of the fear factor is coming out of the market," says Chris Orndorff, a portfolio manager at Payden & Rygel. "Investors are starting to realize that it is unlikely that other firms are going to disappear overnight like Bear Stearns did."

The decision in mid-March by the nation's central bank to make its cash available to brokerage firms, coupled with proposals to better police financial firms announced Monday by the U.S. Treasury Department, seems to have reassured investors that the worst-case financial scenarios are unlikely.

Stocks soared Tuesday as a result. The Standard & Poor's 500 index, which accounts for about 70% of the value of the stock market, rallied 3.6% to 1370 — the best start to a second quarter since a 4.8% jump in 1938, S&P says. The big jump, which was driven largely by double-digit gains posted by financial stocks, cut the S&P's 2008 loss to 6.7%.

The Dow Jones industrials jumped 391 points, or 3.2%, to 12,654, slashing its 2008 loss to 4.6%.

Investors seem to be taking comfort in the fact that major financial companies are moving swiftly to address liquidity concerns and boost investor confidence.

The big gains came despite the fact that UBS, (UBS) one of Europe's biggest banks, said Tuesday that it would write down $19 billion more to cover losses related to mortgage-related assets. On the positive side, UBS also said it will issue $15 billion in stock to bolster its cash reserves.

"We are moving between two storms," says David Kelly, chief market strategist at JPMorgan Funds. "It looks like the credit angst is dying down just as economic angst is rising."

The economy is just now starting to feel the negative effects of slowing growth. But Kelly says investors are more adept at dealing with a recession. "We have gone from worrying about an unknown story (the credit crisis) to a known story (an economic slowdown)," Kelly says. However, there was a bright spot Tuesday in news that March manufacturing was not as weak as thought.

But a recession can still hurt stocks. "The euphoria will be replaced by the cold hard realism that earnings are going to be much lower than they were in 2007," Orndorff says. "The feeling of crisis may be over, but the hard part of making money is just beginning."