NEW YORK - Wall Street finished a strong week little changed Friday after investors looked past weaker-than-expected economic readings and focused on the ramifications of the Federal Reserve's decision on interest rates next week.
Stocks initially fell sharply Friday following a government report that August retail sales excluding automobiles declined precipitously. The report suggested consumers held off spending in the face of turmoil in the financial markets, an unwelcome development that some on Wall Street are hoping could be reversed by a rate cut. Some investors regarded the readings as supporting the case for a rate cut when Fed policy makers meet Tuesday.
'Emotions are running fairly high,' said Robert Schaeffer, vice president at Becker Capital Management Inc. in Portland, Ore. 'I think you're seeing a lot of normal gyrations in anticipation of whatever the Fed does. They're looking at the economic data and trying to cypher out of that how that's going to impact the Fed's decision next week,' he said of investors.
Friday's session began with unease over the Bank of England's decision to grant emergency funding to lender Northern Rock PLC, which was facing a possible liquidity crisis. The need for the bailout unearthed fresh concerns about the fallout from tightness in the credit markets.
Investors eventually set aside some of their concerns and the Dow Jones industrial average finished up 17.64, or 0.13 percent, at 13,442.52 after being down as much as 100 points early in the session. The advance gave the blue chip index a gain of 2.5 percent for the week - the Dow's biggest weekly point gain since April.
Broader stock indicators likewise showed modest gains Friday but managed their biggest weekly gains since mid-August. The Standard & Poor's 500 index rose 0.30, or 0.02 percent, to 1,484.25, and the Nasdaq composite index edged up 1.12, or 0.04 percent, to 2,602.18.
For the week, the S&P rose 2.2 percent, while the Nasdaq added 1.4 percent.
Government bond prices finished almost unchanged Friday. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 4.46 percent from 4.49 percent late Thursday.
Stocks took a hit early Friday after the Commerce Department reported that retail sales fell 0.4 percent in August excluding vehicle sales. Wall Street had been looking for a gain excluding autos. Over all, including autos, retail sales increased 0.3 percent last month.
Investors have been on edge over whether tightness in the credit market, a housing slump and volatility on Wall Street have dented consumer spending, which accounts for more than two-thirds of economic activity.
In another report that perhaps stirred unease about the economy, industrial production in August edged up by just 0.2 percent, the weakest advance in three months. The figure reflects a 0.3 percent decline in output from U.S. factories.
Wall Street seemed to wrestle with how the readings might affect the Fed's stance on interest rates. The central bank has left the benchmark fed funds rate unchanged at 5.25 percent for more than year after a string of increases and hasn't cut rates since 2003. Many on Wall Street expect a cut and are debating whether it will be a quarter percentage point or a half percentage point.
While a cut would make some borrowing less expensive, not all costs would necessarily come down. Some adjustable rate mortgages, a chunk of which are due to reset from low initial rates this fall, are tied to benchmarks other than the fed funds rate, such as the London Interbank Offered Rate, which last week hit multiyear highs.
'Everyone expects the Fed to cut. I guess one of our concerns is the feeling the market has that either the Fed or the government can legislate prosperity,' said Denis Amato, chief investment officer at Ancora Advisors in Cleveland. 'The Fed can sometimes dampen volatility but they can't create prosperity by pumping money into the system. At some point they have to let some of these excesses play out,' he said, referring to trouble in the housing market and tighter access to credit.
Northern Rock's appeal to the Bank of England touched off concerns about the viral nature of problems in the U.S. mortgage market and how long concerns about subprime mortgages - those made to borrowers with weak credit - might persist. Britain's FTSE 100 came off its lows but still finished down 1.17 percent.
Amato said the Fed must balance concerns about cutting rates to ease some of Wall Street's worries about credit with a need to keep inflation in check and the dollar from continuing to slide.
'Our concern is that the Fed is sort of in a box because if they cut too fast they run the risk of weakening the dollar. If we see foreign investors figure the dollar is declining they might pull their money, in which case the rates go up, not down,' said Amato.
Indeed, if rates decline, investors could take money out of Treasurys and seek higher-yielding assets elsewhere.
The focus on the Fed and other economic issues has led investors to appear little concerned this week by record oil prices. Light, sweet crude fell 99 cents Friday to settle at $79.10 on the New York Mercantile Exchange. Oil closed above $80 per barrel for the first time Thursday.
Gold prices settled moderately lower, while the dollar traded mixed against other major currencies.
Advancing issues outpaced decliners by about 9 to 7 on the New York Stock Exchange, where consolidated volume came to a light 2.65 billion shares compared with 2.87 billion traded Thursday.
The Russell 2000 index of smaller companies rose 3.14, or 0.40 percent, to 783.49.
In markets abroad, Germany's DAX index fell 0.51 percent and France's CAC-40 lost 0.49 percent. In Asia, Japan's Nikkei stock average closed up 1.94 percent, while Hong Kong's Hang Seng Index gained 1.47 percent.