Rally Caps Positive Week for Stocks

Major indexes posted solid gains on positive comments from Greenspan on the economy and an investment banking settlement

Stocks finished near session highs Friday, mounting an impressive rally after three consecutive losing days. Investors rallied behind positive comments from Alan Greenspan about the economy and a settlement between securities firms and regulators. Major indexes finished ahead for the week, after two straight losing weeks. Trading volume was heavy Friday on "quadruple witching" -- simultaneous expiration of stock index futures and options contracts, and individual stock options and futures contracts.

"Technically, it's a reflex rally," says Art Hogan, chief market analyst at Boston-based Jefferies & Co., who thought negative corporate earnings reports and fears of war with Iraq in the past few days led to an oversold market. "We put some of the bad news behind us," he said. Hogan said the rest of the year should finish quietly, despite a plethora of economic data expected next week. "We're probably within 100 points of where the Dow is going to finish," he said.

The Dow Jones Industrial average finished ahead 147.21 points, or 1.76%, to 8,512.01. The broader Standard & Poor's 500-stock index was up 11.58 points, or 1.31%, to 895.83. The tech-laden Nasdaq composite index ticked up 9.57 points, or 0.71%, to 1,363.67.

Though war with Iraq appeared increasingly likely, Federal Reserve Chairman Alan Greenspan boosted investors' spirits. He said the U.S. economy is steadily improving in a speech Thursday evening before the Economic Club of New York. Greenspan also said there is little risk of deflation, which investors feared would pinch spending. However, Greenspan did say that economy still faces barriers to healthy growth.

In other economic news, the U.S. gross domestic product grew at a 4% rate in the third quarter, the Commerce Dept. said Friday morning. That figure matched a Nov. 26 estimate. In the second quarter, the GDP grew at 1.3%.

The week ahead will bring much economic data for investors to digest. On Monday, November personal income and spending data is expected. MMS International, an economic research firm, says consumption should outstrip income growth "by a wide margin." Also on tap for Monday: The University of Michigan updates its December consumer sentiment index. A downward revision is likely, owing to recent stock sell-offs and geopolitical strife.

Investors' attention on Friday was focused on some of the world's largest securities firms, including Citigroup (C ) and Merrill Lynch (MER ), as they settled claims they misled investors for an aggregate of $1.4 billion. In addition to fines, which amounted to $900 million, investment banks agreed to provide $450 million in funding for independent research and $85 million for "investor education". News of the settlement, along with the broader market upswing, drove financial stocks higher midday Friday. "The psychological impact was huge," said Hogan.

Citigroup, which came under fire especially for alleged improprieties of telecom analyst Jack Grubman, reportedly was to pay the highest amount -- $400 million. Credit Suisse First Boston and Merrill Lynch reportedly would pay the second-highest fines at $200 million apiece. Other banks, such as J.P. Morgan Chase (JPM ) and Lehman Brothers (LEH ), would each be liable for $80 million in fines, according to reports.

According to S&P's MarketScope, investors also bought on the news that Sen. Trent Lott would give up his position as Senate Majority Leader, resolving a knotty political issue.

Absent any significant earnings releases Friday, investors took their cue from shoemaker Nike (NKE ), which announced better-than-expected second-quarter profits after Thursday's market close. Shares in the Oregon-based company rose 8.6% Friday, lifting the entire footwear sector, according to S&P's MarketScope. Competitor Reebok International (RBK ) gained 6.96%, and K Swiss (KSWS ) rose 4.26%.

Earnings news was expected to be relatively quiet in the next two weeks, picking up again after the New Year.

Other big-name movers included energy services company Halliburton (HAL ), which slipped on news that the SEC launched a formal investigation into the company's accounting practices.

Also slipping Friday was hospital operator Tenet Healthcare Corp. (THC ), which watched shares fall more than 9% on news that federal agents removed records from one of the company's medical centers.

Treasury Market

U.S. Treasury prices fell, as Greenspan's upbeat speech on the economy put pressure on prices across the curve. Prices recovered somewhat from early losses, but remained in the red by day's end as stocks rallied. "Low interest rates and rapid advances in productivity have been providing considerable support to economic activity," Greenspan said. "The U.S. economy has been working its way through a soft patch."

The unrevised GDP figure had little impact on Treasuries, notes MMS.

World Markets

European markets closed higher Friday. In London, the FTSE 100 index gained 48.50 points, or 1.26%, to 3,889.90. Paris' CAC 40 index rose 28.64 points, or 0.94%, to 3,082.85. In Frankfurt, the DAX index was up 62.81 points, or 2.12%, to 3,024.22.

In Asia, stocks finished with gains. Japan's Nikkei 225 Index closed ahead 19.31 points, or 0.23%, to 8,406.88. In Hong Kong, the benchmark Hang Seng index rose 70.83 points, or 0.74%, to 9,628.69.

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