Stocks rally at end of tough week
Investors shrug off the jump in consumer inflation, focusing on lower crude prices, a stronger dollar and deal-making talk.
NEW YORK (CNNMoney.com) -- Stocks rallied Friday, muscling back at the end of a tough week, with a stronger dollar and weaker oil prices giving investors a reason to dive back into some recently beaten-down shares.
The Dow Jones industrial average (INDU) gained 1.4%. The broader Standard & Poor's 500 (SPX) index gained 1.5% and the Nasdaq composite (COMP) climbed 2.1%.
Stocks rose modestly at the open and picked up the pace as the session wore on, despite a report showing a big jump in consumer inflation.
"The inflation news was certainly not good, but what's helping the market is all the talk about strengthening the dollar and bringing oil prices down," said Peter Cardillo, chief market economist at Avalon Partners.
"We're seeing jawboning from Fed officials, Treasury officials, central bank officials about boosting the dollar, which could drive out some of the speculation in commodities markets," he said.
In addition to the day's news, investors were also taking advantage of some lower stock prices, following a tough period on Wall Street.
Over the last five trading sessions, the Dow has lost nearly 4%, the S&P 500 around 4.5% and the Nasdaq more than 5.5%. The declines were sparked by worries about how higher inflation will hurt an already-struggling economy, and by a new wave of problems for the financial sector.
"I think the equity market is benefiting from a relief rally, particularly in the financial sector," said Tom Sowanick, chief investment officer at Clearbrook Financial LLC.
"The heightened fear of Lehman becoming the next Bear Stearns has eased," he said, referring to the near collapse and rescue of the investment bank in March.
On the move: Lehman Brothers (LEH, Fortune 500) shares jumped 13.7% Friday, bouncing back after a tough week in which the investment bank announced a stunning $2.8 billion quarterly loss and a management shakeup. Lehman recovered on reports that BlackRock (BLK, Fortune 500) bought its shares in a stock offering earlier this week.
A variety of other financial stocks jumped too, lifting the Amex Securities Broker/Dealer index by 5.2%.
Regional banks slumped, however, following KeyCorp's (KEY, Fortune 500) announcement Thursday that it was cutting its dividend in half and raising $1.5 billion to shore up its balance sheet.
On Friday, an analyst at BMO Capital Markets said Fifth Third Bancorp (FITB, Fortune 500) could cut its dividend by as much as 50% and needs to raise capital to protect its balance sheet. Shares of the company lost 10.4% in active Nasdaq trade.
Stocks struggled higher Thursday as investors welcomed a strong May retail sales report and talk that Belgian company InBev made a $46 billion bid for Anheuser-Busch (BUD, Fortune 500). However, gains were cut after it was announced that a potential Microsoft-Yahoo merger had fallen through.
Yahoo (YHOO, Fortune 500) remained in focus Friday on news that it has partnered with Google (GOOG, Fortune 500) on an online advertising deal, in lieu of the Microsoft (MSFT, Fortune 500) takeover.
And Anheuser-Busch was in focus again on reports that it is in talks with Grupo Modelo to ward off InBev.
Market breadth was positive. On the New York Stock Exchange, winners topped losers 7 to 3 on volume of 1.25 billion shares. On the Nasdaq, advancers topped decliners 7 to 3 on volume of 2.11 billion shares.
Consumer inflation up: The Consumer Price Index (CPI) rose 0.6% in May after rising 0.2% in April, reflecting the spike in oil and gas prices, and bringing the annual rate to 4.2%. Economists surveyed by Briefing.com had expected a rise of 0.5%.
So-called core CPI, which strips out volatile food and energy prices, rose 0.2% in the month, as expected, after rising 0.1% in April. (Full story).
Consumer sentiment dips: The University of Michigan's June consumer sentiment survey fell to 56.7 from 59.8 in May, reflecting the increase in commodity prices and turmoil in the economy. Economists thought sentiment would fall to 59, on average.
Oil prices retreat: U.S. light crude oil for July delivery fell $1.88 to settle at $134.86 a barrel on the New York Mercantile Exchange.
Gas hits new record: The national average price for a gallon of regular unleaded gas rose to a record high of $4.066 from the previous day's record of $4.060, AAA reported.
Other markets: In currency trading, the dollar gained versus the euro and the yen.
COMEX gold for August delivery rose $1.10 to settle at $873.10 an ounce.
In the bond market, Treasury prices slumped, raising the yield on the benchmark 10-year note to 4.26% from 4.21% late Thursday. Bond prices and yields move in opposite directions.
And the housing market was dealt another blow after a report showed a big jump in foreclosures in May. Approximately 73,000 families lost their homes to bank repossessions last month, a jump of 48% from the year-earlier period, according to RealtyTrac, an online marketer of foreclosed properties. (Full story). 
