Stocks wavered Friday amid more turmoil for bond insurers and a statement from a Federal Reserve official that a recession may be unavoidable.
The Dow Jones Industrial Average and S&P 500 index declined. The Nasdaq got a boost from an Amazon stock-and-debt buyback announcement, which helped the tech-heavy index move further away from bear-market territory. Earlier this week, the Nasdaq fell more than 20% below its recent high, the definition of a bear market.
"Every big market drop I was very bullish because they were based off of fear," said Tony Dwyer, equity-market strategist at FTN Midwest Securities. "What's different in this drop is that it's based on some reality: Credit-market issues are still very problematic. The Fed easing hasn't resolved that yet."
Amazon helped the Nasdaq buck the downward trend Friday after the Internet retailer's board authorized the repurchase of up to $1 billion of the company's common stock over the next two years and some of the company's debt.
Tech stocks -- Microsoft and Hewlett-Packard -- were among the biggest gainers on the Dow, after taking a beating in recent sessions. Appleposted strong gains on the Nasdaq.
McDonald's was the Dow's biggest gainer.
On the flip side, the Dow's top decliners included American Express and J.P. Morgan , perhaps due to profit-taking after financials enjoyed strong gains on Thursday.
Financials have been on a lot of buy lists lately amid attractive valuations but not everyone is convinced.
"I think before we can dive back into financials, first we have to get a handle on what kind of a problem they're facing," Gina Sanchez, managing director for the California Endowment, told CNBC Friday. "Banks still don't know what they have on their balance sheets," she said, adding that the sectors problems will go on for at least another six months -- probably longer.
Shares of MBIA rebounded from an early slide after the world's largest bond insurer sold shares at a 14 percent discount to its closing price to raise capital. Shares slid 13 percent before the bell.
MBIA's woes were compounded from news that bond insurer XL Capital Assurance, a unit of Security Capital Assurance, had its "AAA" ratings cut by Moody's Investors Services.
In politics, Congress passed a $152 billion fiscal stimulus package to fend off an election-year recession by sending government rebate checks to millions of Americans and providing business tax incentives to boost spending. President Bush said he will sign the package into law next week.
But warning bells regarding the U.S. economy continued to ring.
San Francisco Federal Reserve Bank President Janet Yellen, the third Fed official to raise concerns this week, said the central bank is willing to cut U.S. interest rates further but added that she was "not confident" a recession can be avoided this year.
And the news wasn't much better on the consumer front as luxury jeweler Tiffany and fast-food chain McDonald's reported some good news, but with a catch: It was all due to strength overseas. It's not a good sign when high-end U.S. consumers are cutting back spending, and even fast-food sales are soggy.
Still, retail stocks went up ... again.
"There's this bet that the consumer is going to permanently decline," Dwyer said. "The stocks that have been heavily shorted in anticipation of that all of a sudden begin to rip higher."
Tiffany , the biggest advancer on the S&P 500, said Friday that it's planning its U.S. business carefully for the first half of 2008 after same-store sales dropped 2% in the U.S. during the crucial November-December holiday period. However, the retailer expects strong international sales to boost earnings. The company set its full-year earnings range between $2.50 to $2.55 a share, well above the $2.28 analysts expect, according to Thomson Financial.
Retailers on both the high and low ends turned in dismal January sales numbers on Thursday.
Wholesale inventories jumped a larger-than-expected 1.1 percent in December while wholesale sales of durable goods posted the biggest drop in more than six years, the Commerce Department reported Friday. The inventory-to-sales ratio, which measures how long it would take to work through inventories, ticked up to 1.09 months from a record low of 1.07 months in November.
McDonald's, the Dow's top gainer, reported that same-store sales rose 5.7 percent in January as overseas sales got a boost from the weak dollar. U.S. same-store sales, however, rose just 1.9 percent.
Housing's Latest Victim
The housing-market slump took a toll on lumber giant Weyerhaeuser , which swung to a fourth-quarter loss amid weak demand for building materials. The company expects the downturn to extend through the year.
Mortgage financier Fannie Mae is expected to post a significant loss of $1.34 per share.
On the upside, it appears that the biggest winners of President Bush's economic-stimulus plan may be Americans with more expensive homes, who will be able to refinance their home loans at cheaper rates.
In other earnings news, Alcatel-Lucent reported an annual loss of 443 million euros ($647.8 million), beating the average forecast of 789 million euros, according to analysts polled by Reuters. The French-American telecom-equipment maker said it expects to incur an adjusted operating loss in the first quarter of 2008 due to "seasonal patterns."
Chrysler plans to cut its product line by half and also sharply reduce the numbers of dealerships as part of its strategy to cut costs and boost profitability, CNBC has learned.
Shares of Allergan skidded after the FDA said it was reviewing the safety of Botox and a competing product after reports of deaths and serious reactions to the anti-aging treatment. The most serious cases -- including deaths -- occurred mostly in children who were given the treatment for spasticity related to cerebral palsy, a use not approved in the U.S. Regulators said doctors should warn patients about the treatment's potential deadly effects. The FDA plans a 2:15 ET conference call on the warning.
Shares of Medicis Pharmaceutical, which has been trying to win FDA approval for a Botox competitor called Reloxin, also declined.