Stocks Finish at Session Highs

Upbeat economic reports fueled buying. On Monday, investors will get updates on manufacturing, auto sales, and construction spending

Stocks finished Friday near session highs as the latest reports on consumer sentiment and manufacturing suggested a rebounding economy.

The Dow Jones industrial average finished up 139.08 points, or 1.60%, at 8,850.26, with all components contributing to the advance. The broader Standard & Poor's 500 index gained 13.95 points, or 1.47%, at 963.59. Helped by biotechs, the technology-laced Nasdaq composite index gained 20.96 points, or 1.33%, at 1,595.91.

The market, which has been gaining momentum since last week, is getting increasingly bullish on recovery in the second half. This makes stocks a more favorable investment. "We believe bonds offer a less-attractive reward-risk tradeoff than stocks," say PNC Advisors' chief investment strategist Jeffrey Kleintop. He figures a price-to-earnings ratio of 18 to 19 times forward earnings of $55.50 to be fair value for the S&P 500 for the year-end 2003. That leaves about 10% more upside from current levels.

Friday's release of the May update on Chicago-PMI was much better than expected. Economic research outfit MMS International had predicted the regional manufacturing gauge would rise to 49.0 from April's level of 47.6. Instead it rose to 52.2. A reading above 50 signifies expansion. The data could also bode well for Monday's release of the nationally-based ISM report.

The final read on the University of Michigan's consumer sentiment index for May was about in line with expectations. At 92.1, the figure was lower from the preliminary level of 93.2 but still above April's 86.0. MMS expected the reading to come in at 91.5.

"The climate of rising confidence since the conclusion of war in Iraq points to a decent economic rebound in the offing," says chief economist David Gitlitz at TrendMacrolytics.

On Monday, investors will get an update on the national ISM manufacturing gauge. In May, economists at MMS expect a rise to 50.0 from April's 45.4. Other recent factory surveys all suggest improvement, with the only real question by how much.

Other updates on construction spending and auto sales area also due.

In company news Friday, shares of Imclone (IMCLE ), maker of experimental cancer treatment Erbitux, climbed amid the latest positive clinical data on the drug.

Software giant Microsoft (MSFT ) said it would pay $750 million to AOL Time Warner (AOL ) to settle a 16-month-long antitrust fights. The companies vowed to work together on Internet-based media and technology.

Novellus Systems (NVLS ), maker of microchip production tools reaffirmed its outlook for lower second-quarter bookings and earnings, blaming a SARS-related slowdown.

Dow component Home Depot (HD ) approved a plan to buy back up to $500 million of its stock.

Treasury Market

U.S Treasuries fell in price Friday as stocks rallied on the latest signs of improvement in the economy.

In other data, U.S. personal income was unchanged in April following a 0.4% gain in March, in line with expectations. Consumption fell 0.1% after an upwardly revised 0.8% gain in March.

World Markets

European markets finished mixed. An European Central Bank policy ease next Thursday would be of little or no surprise to the market given recent statements from ECB Council members, but the scale of the move remains open to debate, says MMS.

In London, the Financial Times-Stock Exchange 100 shed 35.50 points, or 0.87%, to 4,048.10. Prime Minister Blair is trying to make a case for the U.K. to join the single currency, cooperating with the European Union.

In Germany, the DAX Index gained 75.97 points, or 2.61%, to 2,982.68, as Schroeder picks up business support for work reforms. France's the CAC 40 added 22.57 points, or 0.76%, to 2,991.75.

In Asia, markets ended mixed. Japan's Nikkei index extended gains by 49.15 points, or 0.59%, to 8,424.51, led by tech shares and exporters as the Nasdaq continues to gain ground. In Hong Kong, the Hang Seng index slipped 21.17 points, or 0.22%, to 9,487.38.

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