Stocks pared losses but remained lower ahead of the weekend amid surging oil prices, and as Congress seemed on track to trigger a government shutdown by failing to agree to a budget for the rest of the fiscal year.
The Dow Jones Industrial Average fell more than 30 points, after dropping more than 80 earlier, a day after a volatile sessiontriggered by news of a second earthquake in Japan.
Among Dow components, Cisco and Alcoa fell, while Merck and Pfizer rose.
The S&P 500 and the Nasdaq also declined. The CBOE Volatility Index, widely considered the best gauge of fear in the market, fell below 17.
Among key S&P sectors, industrials and financials fell, while energy and health care rose.
Most of the market action on Friday was in commodities as gold soared to yet another new record, closing above $1,473 an ounce. Meanwhile, the dollar sank against the euro, which rose after the European Central Bank raised a key interest rateby 0.25 percent on Thursday.
Oil prices jumped to new records amid attacks on Libyan oil fields, and the sinking dollar. London Brent crude surged above $124 a barrel, while U.S. light crude rose $2.49 to settle at $112.79 a barrel, its highest close since September 2008.
Airlines, affected by rising fuel costs, posted the biggest drop as JetBlue , United Continental and Delta Airlines each dropped.
But energy companies climbed, including Suncor Energy and Nabors Industries . Murphy Oil also gained after the firm won approval to resume drilling a deepwater well in the Gulf of Mexico. But Hercules Offshore tumbled after the oil explorer said it is under investigation by the Department of Justice and the SEC.
The budget negotiationshaven't been a huge factor in trading as "it's universally thought there is going to be a deal," said Kevin Kruszenski, head of listed trading at KeyBanc Capital Markets.
Even if no agreement was reached, "It would have to be a prolonged slowdown for the market to really react," Kruszenski said.
Of greater interest to traders is the start of earnings season, which unofficially begins next Monday when Alcoa releases results after the market closes.
"Earnings season will be kicking off here soon, and people are clearing up some positions in that respect," Kruszenski said.
About a third of the economists, fund managers and strategists who responded to a CNBC Fed surveyexpect the Fed to raise interest rates this year, twice as many who thought that would be the case last month.
President Obama and Congress have yet to reach a budget agreement. Senate Republican leader Mitch McConnell said he expects Congress to reach a U.S. budget deal shortly, as lawmakers scramble to avoid a government shutdown due at midnight. Meanwhile, Republican House leader John Boehner implied that lawmakers are far from reaching a deal.
"The whole thing appears to be silly from the market's perspective," says John Canally, economist at LPL Financial. But, Canally adds, a government shutdown could have real effects on the economy.
One of the concerns is whether economic data released by agencies such as the Commerce Department or the Bureau of Labor Statistics will be made available.
"Near term we’re going to be flying blind on some of the data just at a juncture when you want to know," Canally said. (Read more: A Government Shutdown Could Shut Down Wall Street).
Volume is likely to pick up in the next few weeks as first quarter earnings season will unofficially kick off next week with Alcoa
“I think this market is just basically holding its breadth for earnings,” says Peter Cardillo, chief market economist at Avalon Partners. “The key to earnings obviously is not going to be whether or not they meet or beat expectations, but the mea culpa of companies indicating next quarter is going to be tough due to the Japan earthquake. A lot of multinationals could sound the alarm of disappointing earnings going forward."
Toyota rose after the automaker announced it would resume production at its plants in Japan, although the company will resume at half capacity. And shares of Tokyo Electric Power gained after Mizuho Securities reiterated its "outperform" rating on the operator of a crippled nuclear plant and doubled its price target for the stock.
Expedia soared after news the online travel reservation website would spin-off TripAdvisorinto a separate publicly-traded company. And BofA Merrill raised its price target on the firm to $28 from $26.
Seagate Technology also jumped for a second day after the hard disk drive manufacturer reinstated its dividend and revised its forecast upward. In addition, Caris upped its price target on the firm to $20 from $17 and Craig Hallum raised its rating on the company to "buy" from "neutral."
Retailers saw more activity than other sectors as investors continued to digest same-store sales figures released Thursday, and brokerages revised price targets and ratings on several stocks.
Among those affected was BJ's , which gained after Goldman Sachs raised the wholesale retailer to "buy" from "neutral," and added BJ's to its "conviction buy" list. The brokerage also raised its price target for the stock to $59 a share from $49, and said it represented a better value than Costco . Goldman, meanwhile, cut Costco to "neutral" from "buy," although it raised its price target for BJ's rival to $81 a share from $80.
Target traded flat after Jefferies cut the discount retailer's price target to $59 a share from $64, while Buckle fell after Keybanc cut its rating on the teen retailer to "hold" from "buy," citing valuation.
Tempur-Pedic soared after the mattresses manufacturer offered a bright outlook and raised its full-year targets.
In economic news, U.S. wholesale inventories rose1.0 percent to $473.9 billion, the highest level since December 2000, according to the Commerce Department. Wholesale inventories also rose 1.0 percent in January.
On Tap Next Week:
MONDAY: Evans speaks, Yellen speaks; earnings from Alcoa and Chevron's interim results after the bell.
TUESDAY: International trade, import and export prices, 3-year Treasury note auction, Treasury budget, CFTC's Gensler testifies on derivatives regulation, Dudley speaks, Bank of NY Mellon shareholder meeting
WEDNESDAY: Weekly mortgage applications, retail sales, business inventories, oil inventories, 10-year Treasury note auction, Beige Book, United Technologies shareholder meeting; earnings from JPMorgan before-the-bell.
THURSDAY: Weekly jobless claims, PPI, 30-year Treasury bond auction, Kocherlakota speaks, Plosser speaks, Lacker speaks, Nestle shareholder meeting; earnings from Hasbro before-the-bell and Google after-the-bell.
FRIDAY: CPI, Empire state manufacturing survey, Treasury international capital, industrial production, consumer sentiment, credit card default rates reported; Evans speaks, Hoenig speaks, G24/International Monetary Affairs meeting; Earnings from Bank of America and Mattel before-the-bell.
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