Stocks gyrated Friday, ending modestly higher, amid conflicting interpretations of Alan Greenspan's remarks on inflation and interest rate policy.
The Dow Jones industrial average rose 32.91 to 7,169.53 after swinging from an early 60-point gain to a midday deficit of 42 points. The blue-chip barometer gained 98.33 on the week, but finished about 55 points shy of Tuesday's record close of 7,225.32.Broader stock indicators also traced the movements of the bond market, which started the day higher amid speculation that Green-span, the chairman of the Federal Reserve, had hinted the central bank won't need to raise interest rates aggressively to protect against inflation.
Greenspan, in a speech Thursday night in New York, was typically vague in discussing the likelihood of a rate hike at the next Fed policy meeting on May 20. But many investors took his remarks to mean that the Fed won't raise rates this month.
"It was a topsy-turvy day. There were a lot of spins to the Greenspan testimony, but no great conviction," said Larry Wachtel, a market analyst at Prudential Securities, noting that headlines in the Washington Post and New York Post offered opposing viewpoints of the Fed chairman's message. "That's usually the case when Greenspan speaks."
In late March, the Fed raised one of its key lending rates for the first time in two years, hoping to ease inflationary pressures by slowing the pace of borrowing and spending. The markets fell sharply after that credit tightening, with investors fearing the Fed would raise rates repeatedly, muzzling the economy and corporate profits.
While the initial reaction to Greenspan's remarks was positive, the bond market turned lower around midday, pressured by lingering doubts about the Fed's intentions and a big drop in the foreign exchange value of the dollar, which makes U.S. investments less attractive to overseas investors.
"That was an ominous setback in dollar. The American debt market has been highly dependent on foreign demand for the last two years," said Michael Metz, chief investment strategist at Oppenheimer & Co.
As bond prices fell, the yield on 30-year Treasury bonds rose as high as 6.94 percent - creating fears of another move above 7 percent - but eased to 6.89 percent as bonds recovered in the afternoon.
The long-bond yield, another key determinant of borrowing costs, fell below that key level last week, fueling a sharp stock rally that climaxed with record highs on Monday and Tuesday. Since then, however, the market has struggled.
"The problem at these levels is that the market is assuming that earnings momentum will be strong and that the increase in interest rates will be transitory," said Metz, who expects the Fed to raise rates more than once in the coming months. "All of these positive considerations are fully discounted in the present level of stock prices, so there's no room for disappointment."
Advancing issues outnumbered decliners by an 8-to-5 margin on the New York Stock Exchange, where volume was modest at 455.62 million shares as of 4 p.m.
The Standard & Poor's 500 list rose 4.52 to 824.78, and the NYSE composite index rose 2.33 to 429.23.
The NASDAQ composite index rose 4.22 to 1,335.05, and the American Stock Exchange composite index rose 2.83 to 573.78.
The Dow's biggest gainers were Caterpillar, up 23/8 to 965/8; Procter & Gamble, up 2 to 132; American Express, up 11/2 to 681/2; and Merck, up 11/2 to 901/4.
Overseas, Tokyo's Nikkei stock average fell 1.3 percent, Frankfurt's DAX index rose 0.3 percent and London's FT-SE 100 rose 1.1 percent to its sixth straight record high.