The financial sector's comeback and a more than $6 a barrel drop in oil prices gave stocks and end of the week pick-me up.
A double shot of soothing comments from Federal Reserve Chairman Ben Bernanke and the Oracle of Omaha, Warren Buffett, also helped.
The Dow Jones Industrial Average gained nearly 200 points, or 1.7 percent. The S&P 500 rose 1.1 percent and the Nasdaq gained 1.4 percent.
But Friday's gains weren't enough to keep the indexes afloat for the week: The Dow lost 0.3 percent, the S&P skidded 0.5 percent and the Nasdaq fell 1.5 percent.
Light, sweet crude fell back down to Earth Friday after soaring above $121 a barrel a day earlier. Oil dropped more than $6, or 5.4 percent, to settle at $114.59 a barrel. It was the biggest one-day percentage drop in nearly four years and the largest dollar drop in more than 7 years. Oil eked out a gain of 0.6 percent for the week.
Bernanke called the recent decline in commodity prices and stabilization of the U.S. dollar "encouraging," in opening remarks at the Fed symposium in Jackson Hole, Wyo. These developments "should lead inflation to moderatelater this year and next," Bernanke said in prepared remarks.
Market jitters began to subside as all three of the problems plaguing the market -- Lehman Brothers, Fannie Mae and Freddie Mac -- appeared headed toward resolution. The COBE Volatility Index fell below 20, finishing out the week at 18.78, its lowest since early June.
"Those three names have put a cloud over financials," said Art Hogan, chief market analyst at Jefferies. "I think the market is going to celebrate the fact that we can get rid of some of that overhang."
Still, Freddie Mac shares shed more than half of their value this week and Fannie Mae dropped 37 percent as investors worried that one way or the other, the stocks would be wiped out.
Lehman Brothers gained more than 5 percent amid speculation of a takeover. CEO Dick Fuld has come under fire recently from everyone from Ladenburg Thalmann analyst Dick Bove to CNBC's Jim Cramerfor not acting swiftly enough to shore up the bank's balance sheet. Given the firm's inability to convince Wall Street that its liquidity is stable, Bove said the firm is ripe for a hostile takeover and slapped the stock with a "buy" rating on that basis. Citigroup also has a "buy" rating on Lehman.
Bove's remarks folllowed a comment by Korea Development Bank that Lehman was a possible acquisition target for the state-run bank.
Financials were the day's top gainer Friday, advancing 3.1 percent, but that only erased about half of the brutality inflicted on the sector this week, leaving it down more than 3 percent on the week. Lehman finished the week down 11 percent.
Energy stocks were the week's best performers, up 5.2 percent.
Meanwhile, Warren Buffett weighed in on everything from the dollar to Fannie Mae and Freddie Mac during an interview with CNBC. Buffett said he has no bets against the dollar and thinks stocks are more attractive now than a year ago. He also said Fannie Mae and Freddie Mac "are too big to fail," but shareholders could "lose a lot of money." (Read more from the interview in the Buffett blog.)
General Motors rose more than 3 percent, holding above its recent resistance level of $10 a share. But GM was among the week's worst performers, shedding 6.6 percent.
You knew it was coming: The Big Three US auto makers are gearing up to ask for their own government bailout. GM, Ford and Chrysler are expected to ask for a whopping $25 billion in federal loansin a pitch to the government sometime after Labor Day, the Wall Street Journal reported.
Meanwhile, the U.S. economy could be in danger from another property-related downturn. Commercial real-estate loans are now looking vulnerable, the New York Times reported.
On the earnings front, Gaptopped expectations after the bell Thursday, with margins improving.
AnnTaylor also surpassed forecasts and backed its full-year outlook as tight control of inventories helped offset falling sales at the women's clothing chain.
Looking ahead to next week, don't expect too much. We're in the final week of summer and by Hogan's estimates, Wall Street will be running on about 30 percent power.
We've got reports on existing and new home sales, as well as personal spending but Hogan says the only number worth watching is probably durable goods on Wednesday.
"I'd like to see ex-transportation in positive territory," Hogan said of the durable-goods report. "Anything in positive territory would be a home run," he said, adding that it was certainly possible as we've still got half of the rebate checks built into July.
NEXT WEEK:
MONDAY-THURSDAY: Democratic National Convention in Denver
MONDAY: Existing-home sales; Reports from Chicago, Dallas Fed branches; Earnings from China Unicom
TUESDAY: ICSC chain-store sales; Case-Shiller home-price index; New-home sales; Richmond Fed report; consumer confidence; Fed minutes; Census bureau releases 2007 stats; Earnings from Smithfield Foods, Big Lots
WEDNESDAY: Weekly mortgage applications; durable goods; Fed's Lockhart speaks; weekly crude inventories; Report from Chicago Fed; Earnings from American Eagle, Dollar Tree
THURSDAY: Jobless claims; GDP, corporate profits; natural-gas inventories; Earnings from Sears Holdings, Tiffany and Dell
FRIDAY: Personal income and spending; Chicago manuf. report; consumer sentiment; farm prices
WATCHERS: McCain VP announcement
Send comments to cindy.perman@nbcuni.com.
