Stocks end with a gain

NEW YORK (CNNMoney.com) -- Stocks climbed Thursday, as investors bet that a big drop in new home sales and a weak reading on GDP growth will make the Federal Reserve more likely to cut interest rates further.

However, gains were limited by surging oil prices and some anticipation about Friday's economic reports.

The Dow Jones industrial average (Charts) added 0.3 percent, ending about 82 points away from its all-time high above 14,000, which it hit in July.

The broader S&P 500 (Charts) index added 0.4 percent and the tech-fueled Nasdaq composite (Charts) added 0.4 percent.

Treasury prices jumped, lowering the corresponding yields, also on bets that the Fed is likely to keep cutting interest rates. Oil and gold prices rose.

Friday morning brings readings on personal income and spending - and the PCE deflator, the report's inflation component. After the start of trading, the consumer sentiment index from the University of Michigan is due, along with the read on construction spending and the Chicago PMI, a regional manufacturing report.

Stocks have been rising since the Federal Reserve cut interest rates last week for the first time in four years, and that optimism has continue to put a floor under the market this week.

The bullish underlying tone seemed to put investors back in the "bad news is good news" camp regarding economic news, with weaker reports speaking to hopes that the Fed will have reason to keep cutting interest rates going forward.

But that assumes that the reports don't suggest higher inflationary pressures or a big drop in consumer spending.

Thursday's reports seemed to hug the line between supporting hopes for further Fed cuts and raising the red flag about the consumer and the economy.

New home sales fell to a 795,000 annual unit rate in August, the lowest level in seven years, from an 867,000 unit rate in July. It was a steeper-than-expected decline.

"The weak report wasn't surprising," said Dean Barber, president at Barber Financial Group. "The trend in the sector isn't going to correct itself until late next year."

However, he said that the report in combination with the morning's weaker-than-expected revision of second-quarter GDP growth was adding to questions about how consumer spending is going to hold up.

GDP growth was revised down to 3.8 percent in the second quarter from a previous read of 4.0 percent. Economists surveyed by Briefing.com thought it would be revised down to 3.9 percent.

A separate report Thursday showed a surprise drop in weekly jobless claims last week.

Friday's personal income and spending reports will be the next indicators of how the consumer - whose spending fuels more than two-thirds of economic growth - is holding up.

As long as consumer spending continues to accelerate, stocks should be able to keep pushing higher, Barber said. "Short-term, we remain bullish about the market."

Stocks rose Wednesday after General Motors (Charts, Fortune 500) and its workers' union reached a deal that ended a two-day strike. Also boosting stocks: news that Bear Stearns (Charts, Fortune 500) is talking with Warren Buffett and other investors about buying a stake in the company.

But after surging more than 9 percent Wednesday, GM stock was down about 3 percent Thursday. Bear Stearns was down 1.5 percent Thursday after its big run-up on Wednesday.

Nonetheless, a number of Wednesday's winners continued to rise Thursday, including some big tech companies.

In corporate news, Microsoft (Charts, Fortune 500) said its Halo 3 video game racked up about $170 million in first-day sales.

Sallie Mae (Charts, Fortune 500) jumped Thursday on reports that a group led by private equity firm J.C. Flowers is willing to renegotiate the $25 billion merger deal with the student loan company.

Officially known as SLM (Charts, Fortune 500), Sallie Mae was dealt a blow late Wednesday when the buyers said they wanted out of the deal because of the economic environment and legislation signed by President Bush on Thursday that will trim education-lending subsidies.

But other company news released Thursday was less positive. KB Home (Charts, Fortune 500) reported a steep third-quarter loss that was worse than what analysts were expecting. The homebuilder also warned that the housing market is likely to worsen through 2008.

Rite Aid (Charts, Fortune 500) reported a steeper fiscal second-quarter loss versus a year ago that was worse than what analysts were forecasting. The drug store chain also warned that it would post a bigger quarterly loss for fiscal-year 2007 than it had previously thought.

Market breadth was positive. On the New York Stock Exchange, winners beat losers 2 to 1 on volume of 1.18 billion shares. On the Nasdaq, advancers beat decliners by 4 to 3 as 1.77 billion shares changed hands.

U.S. light crude oil for November delivery rose $2.58 to settle at $82.88 a barrel on the New York Mercantile Exchange, a jump of more than $3.

Last week, the October contract settled at a record high of $83.32. However, the record price remains below inflation-adjusted highs hit in the early 1980s, which would be equal to at least $95 a barrel today.

Treasury prices rose, lowering the yield on the 10-year note to 4.56 percent from 4.62 percent late Wednesday. Bond prices and yields move in opposite directions.

In currency trading, the dollar fell versus the euro and also dipped versus other major currencies.

COMEX gold for December delivery rose $4.40 to settle at $739.90 an ounce.