Stocks rallied to their biggest weekly gains since mid-April after oil prices tumbled more than $4 as a barrel.
The Dow Jones Industrial Average gained 3.6 percent and the S&P 500 index advanced 2.9 percent for the week. The tech-heavy Nasdaq had the best week of the three, climbing 4.5 percent.
The Dow managed two 300-plus point rallies this week — on Tuesday and Friday.
"I think what you're seeing is ... the mini bubble of commodities starting to unfold," said Alan Lancz, president of investment-advisory firm Alan B. Lancz & Associates. "As long as that trend continues, I think we'll have have a continued rally." But, he adds: "I would be cautious the higher the market goes ... don't expect any new highs."
Crude oilclosed at $115.20 a barrel, a three-month low, as the dollar surged and worries about a global slowdown dragged down expectations for demand. Crude lost $10 this week and is now down more than 21 percent from its record close of $145.29 on July 3. The dollar posted its biggest one-day gain in 7 1/2 yearsagainst the euro.
Next week, it's going to be the same story: Energy prices.
We've got CPI and Wal-Mart earnings on Thursday but Lancz says he thinks they'll be nonevents. "Even if the numbers are weak, if the trend of energy is lower, people will discount those numbers, assuming that lower energy prices will lead to more discretionary income — more gas in the tank — for consumers."
Home Depot was the biggest gainer on the Dow today and United parent UAL was the Nasdaq's best performer, both due to the drop in oil prices.
For the week, consumer-discretionary stocks were the best performer, up 7.7 percent, followed by information-technology stocks, up 6 percent.
Retailers posted disappointing July same-store sales yesterday, but forward-looking investors bid up select retailers including Polo Ralph Lauren , Coach and J.C. Penney , which all gained more than 18 percent this week.
McDonald's rose 6.2 percent after July sales beat forecasts, helped by dollar beverages and other promotions aimed at cost-conscious consumers.
General Motors gained 2.9 percent Friday after the auto maker announced a $900 million restructuring effort.
Apple rose 3.7 percent after a Credit Suisse analyst said he expects solid growth for the 3G iPhone.
Fannie Mae shares tumbled more than 9 percent -- and are off 23 percent for the week -- after the largest U.S. home-financing source reported a loss of $2.3 billion, missing Wall Street's already lowered expectations. It was Fannie's fourth straight quarterly loss. The company also said it would slash its dividend by more than 85 percent and take other steps to firm up its capital position.
This came just two days after rival Freddie Mac reported it lost $1.63 a share, about three times as big as the loss of 53 cents a share analysts had predicted. The company also said it's doubling its provisions for loan losses to $2.5 billion since the end of the first quarter and that it will slash its dividend by as much as 80 percent. Freddie shares have fallen 26 percent this week, making it the biggest decliner in the S&P 500.
"The financial crisis isn't over," Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vt., told Reuters. The credit "side of the market still has long ways to go if we work under the theory that the minimum of liabilities here are going to be $1 trillion and could be as high as $2 trillion."
Lancz agrees. He says more bad news from the financial sector is one of the only things that could derail next week's energy-fueled rally.
Helping to curb losses in the broader market, bond insurer MBIA reported a massive rise in income to $1.7 billion, from $211.8 million a year earlier, that it attributed to $3.3 billion in pretax unrealized gains on insured credit derivatives due to wider spreads on credit default swaps on MBIA Insurance.
Meanwhile, the toxic debt securities routinely blamed for spreading the effect of the credit crunch worldwide could be regaining favor as money managers, such as BlackRock and PIMCO, start to pick up the assets at bargain prices.
This comes as Citigroup is set to buy back more than $7 billion worth of auction-rate securities from thousands of investors around the world as part of a settlement with federal and state regulators. Merrill is expected to be the next bank to settle, while UBS could face $25 billion securities buyback, according to a published report.
In today's economic news: Nonfarm productivity rose 2.2 percentin the second quarter, and wholesale inventories rose 1.1 percent in June to a seasonally adjusted $435.85 billion.
On Tap for Next Week:
MONDAY: Liberty Media earnings
TUESDAY:International trade; Treasury budget statement; UBS, Applied Materials and NVidia earnings
WEDNESDAY: Mortgage applications; import and export prices; retail sales; business inventories; oil inventories; Macy's earnings
THURSDAY: Consumer price index; jobless claims; Earnings from Wal-Mart, JCPenney and Nordstrom
FRIDAY: Industrial production; Empire State manufacturing; consumer sentiment
Send comments to cindy.perman@nbcuni.com.
