Stocks gained after a handful of positive economic reports, including a slightly better-than-expected gain in industrial production, and a slightly better-than-expected report on consumer price inflation.
The Dow Jones Industrial Average rose more than 30 points after reaching a two-year highon Tuesday.
Caterpillar, Coca-Cola and 3M led blue-chips higher, while General Electric and Alcoa fell.
The S&P 500 was trading flat, while the Nasdaq rose modestly. The CBOE Volatility Index, widely considered the best gauge of fear in the market, rose above 17.
Most key S&P 500 sectors advanced, led by consumer discretionary, industrials and telecom.
The holiday shopping season is in full swing, as the majority of Americans completed only half of their Christmas shopping, according to a new survey. Retailers were largely higher on the news, ranging from online retailer Amazon.com to Big Lots and Tiffany .
Also on Wednesday, the National Association of Home Builders/Wells Fargo reported its housing market index was unchanged at 16 in December, in line with expectations of economists surveyed by Reuters, but still at an historic low. Nonethelss, homebuilders rose Wednesday, including Lennar , KB Home , and Pulte Group .
Microsoft rose after Jefferies raised its second quarter estimates for the tech giant to be in line with consensus views, based on the popularity of Microsoft's Kinect platform for the Xbox 360.
In financial news, Morgan Stanley slipped after Goldman Sachs cuts its fourth quarter earnings per share view for the investment bank to 35 cents a share from 55 cents. Goldman raised Jefferies Group's fourth quarter results to 29 cents a share from 25, saying Jefferies should benefit from improved banking capabilities and high yield issues.
Nomura, meanwhile, cut its fourth quarter earnings estimate for Goldman Sachs to $3.75 a share from $4.25 a share, citing sluggish fixed income clearing revenues, limited flexibility around compensation, and a write-down of $300 million from the firm's designated market maker business. Nomura also cut Morgan Stanley's earnings estimate to 30 cents a share from 40.
Goldman also raised its ratings for U.S. asset managers to "attractive," boosting price targets for the sector by about 19 percent on average. Specifically, Goldman boosted its rating on T. Rowe Price to "buy" from "neutral," and added it to its "conviction buy" list. Goldman also raised Janus Capital to "neutral" from "sell," but cut its rating for Eaton Vance to "sell" from "neutral."
And Wells Fargourged regulatorsto demand mortgage lenders hold more of the loans they originate on their books, instead of selling them on, according to a report in the Financial Times.
In corporate news, McDonald's said it would double the number of its restaurants in Chinato 2,000 by 2013, to take advantage of the rapid growth in the country.
Honeywell fell after the diversified manufacturing company gave disappointing earnings guidance for 2011, in part because of pension costs. Honeywell's earnings were expected to be between $3.50 a share to $3.70 a share on revenues of $35 to billion to $36 billion.
Best Buy fell after Oppenheimer downgraded the electronics retailer to "perform" from "outperform," in a report titled, "A Stark Reminder That TV Sales Matter." Best Buy shares had plunged Tuesday after the retailer reported disappointing earnings as sales of flat TV screens and other electronics slowed.
Whole Foods gained after Bank of America Merrill Lynch resumed coverage of the upscale grocer at a "buy" rating, citing attractive valuation for the shares and "broadened growth prospects."
In M&A news, Dynegy shares jumped afterCarl Icahn said he had agreed to buy the energy companyfor $665 million in cash. Dynegy shareholders rejected a bid by the Blackstone Group three weeks ago.
The bond market reboundedafter a strong selloff after Tuesday's Federal Open Market Committee statement in which the central bank said it was holding rates steady and continuing with its $600 billion quantitative easing program to buy Treasurys. The benchmark 10-year note's yield fell to 3.43 percent after hitting a six-month high of 3.49 percent late Tuesday.
The dollar rose against a basket of currenciesas the euro fell after Moody's delivered another blow to the region, downgrading the outlook for Spain’s sovereign credit rating. Moody’s stressed, however, that it did not expect Spain to have to resort to a bailout from the European Union like Greece and Ireland. Gold, meanwhile, slipped below $1,390an ounce as the dollar rose.
In economic news, the consumer Price Index rose 0.1 percent in November, the Labor Department reported. Excluding volatile food and energy prices, the core CPI also rose 0.1 percent. Economists surveyed by Reuters had expected the CPI to rise by 0.2 percent.
While both the CPI and the producer price index have been subdued for several months, Bruce McCain, chief investment strategist at Key Private Bank, notes the PPI is up 108 percent since 1980, while the CPI is up only 30 percent. That means there is about three times as much inflationary pressure on companies compared to what they have been able to pass along to consumers, McCain said.
"That's a lot of margin pressure businesses have had to absorb over that time," he said. "To the degree inflation expectations are starting to rise, businesses may start to raise prices even at the cost of losing business."
According to McCain, the recent sell-off in bonds shows that investors are worried about inflation.
Also in economic news, industrial output rose 0.4 percent in November, according to Federal Reserve data. That's above an expected gain of 0.3 percent, according to economists surveyed by Reuters. In October, industrial product fell 0.2 percent from a previously reported flat reading. The November reading was the biggest gain since July.
Capacity utilization rose to 75.2 in November, from a revised 74.9 in October, still far below its long-term average. Capacity utilization measures how fully firms are using resources.
The New York Fed's "Empire State" general business conditions index gained 22 points to 10.57 in December from a drop of 11.14 in November. The index was boosted by growth in new orders and shipments, the New York Federal Reserve said.
The Mortgage Bankers Association said applications for home loans felllast week as mortgage rates hit a seven-month high.
Regulators are currently in the process of deciding what mortgages will be exempt from a provision in the Dodd-Frank reform law requiring banks to keep 5 percent of the risk on home loans they create.
The slightly improved economic outlook in the U.S. means travel is likely to rise, as the AAA predicting a 3.1 percent rise in the number of Americans traveling for the end-year holiday.
Investors also have their eye on the Senate, which was preparing to vote on crucial legislation extending the Bush-era tax cuts. Economists expect the tax cuts, if passed, would add one percentage point to economic growth, as a one-year cut in payroll taxes and more certainty would boost activity. But other analysts warned that the tax bill would make the $14 trillion debt of the U.S. even worse.
European stocks closed down, snapping their longest winning streak in six months, after Moody's gloomy outlook on Spain. In Greece, flights were grounded and trains brought to a standstill as fresh anti-austerity protestsculminated in a national walkout.
On Tap This Week:
WEDNESDAY: Credit card default rates, New York manufacturing survey, housing market index, oil inventories; Honeywell's 2011 outlook and Atlanta Fed Pres Lockhart speaks.
THURSDAY: Housing starts, jobless claims, Philadelphia Fed survey; before-the-bell earnings from FedEx, General Mills; after-the-bell earnings from Oracle, Accenture, Research In Motion, and Take-Two.
FRIDAY: Leading indicators, quadruple witching.
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