Stocks Close Week Higher on QE3 Confidence

NEW YORK (TheStreet) -- The major U.S. equity averages finished with solid gains Friday, capping a stellar week as the risk-on trade flourished thanks to the bold stimulus plan outlined by the Federal Reserve.

The central bank chose Thursday to go on the offensive, unveiling an open-ended program to buy $40 billion worth of mortgage-backed securities per month until the job market strengthens, pushing its pledge to keep its zero interest rate policy into at least mid-2015, and maintaining its current bond maturity extension efforts through the end of this year.

A surprise leap in consumer confidence for September despite higher gasoline prices was also helping investor sentiment on Friday. Bonds were hammered, the dollar skidded and gold ticked up as traders repositioned in the wake of Fed Chairman Ben Bernanke's promise to stick with a highly accommodative monetary policy even after the U.S. economy starts to strengthen.

The Dow Jones Industrial Average rose more than 54 points, or 0.40%, to close at 13,593. The blue-chip index finished the week up 2.15%, booking a gain for the eighth time in the last 10 weeks and sixth time in the last seven sessions. Year-to-date, the Dow is now up 11.26%.

Breadth was positive on the Dow with winners outpacing losers, 19 to 11. The biggest percentage gainers were Alcoa , Caterpillar , and du Pont and United Technologies .

Home Depot was also a standout gainer after the Atlanta-based home improvement products retailer said it plans to close its seven remaining big box stores in China and cut 850 jobs. The stock gained 2%.

Prominent Dow decliners included AT&T , Merck , Pfizer , and Verizon .

Bernstein Research lowered its earnings estimates for AT&T, Verizon and Sprint on Friday to account for the impact of Apple's iPhone 5 going on sale in the calendar third quarter.

"The iPhone is a double edged sword for the carriers. It drives usage, and (hopefully) higher ARPU average revenue per user if and when customers exceed usage thresholds," the firm said. "But it also drives higher subsidies, and therefore hurts margins. When a customer who already has a smartphone upgrades to a new one, there's lots of incremental cost ... but not much incremental revenue."

Meantime, Apple shares were again hitting new all-time highs on reports that pre-orders for the iPhone 5 sold out within an hour this morning. The stock rose 1.2% to close at $691.28 after hitting a new peak of $696.98.

Kraft Foods finished in the red on news the company will be replaced within the Dow by UnitedHealth , effective Sept. 24, a change stemming from Kraft's plans to split into two separate publicly traded companies. The shares dipped 0.80%.

The S&P 500 closed up nearly 6 points, or 0.40%, at 1466, and added 1.9% for the week. Year-to-date, the benchmark index is up 16.55% and sitting at levels dating back to December 2007.

The Nasdaq surged more than 28 points, or 0.89%, to settle at 3184. The tech-heavy index is up 22.22%.

The strongest sectors in the broad market were basic materials, energy and consumer cyclicals. Health care, utilities and consumer non-cyclicals were the only groups in the red.

Volume was healthy on Friday, totaling more than 5 billion on the New York Stock Exchange and 1.98 billion on the Nasdaq. Winners were ahead of losers by roughly 2-to-1 ratios on both the Big Board and Nasdaq.

Brian Gendreau, market strategist at Cetera Financial Group, noted the track record for buying equities while the Fed is engaged is executing a quantitative easing program is very good since the financial crisis, saying the S&P 500 rose 36.4% during QE1 and 10.2% during QE2.

"Other matters, such as the impending fiscal cliff and Europe's continuing troubles could, of course, work in the other direction, but the additional liquidity from QE3 will be viewed as a source of support for the market by investors, in my view," he said.

Gendreau expects this third round of stimulus to have a lesser impact on the economy than previous bond-buying programs though. Long-term interest rates are already at such low levels that going down a few basis points further is unlikely to have a big impact on household or corporate borrowing and investing decisions, he said.

The international and commodity markets rallied as well Friday, while Treasuries and the dollar declined sharply.

The FTSE in London was up 1.57% and the DAX in Germany was gaining 1.31%. The Hong Kong Hang Seng index settled up 2.90% and the Nikkei in Japan finished up 1.83%.

The benchmark 10-year Treasury plunged 1 10/32, raising the yield to 1.871%. The greenback tumbled 0.53%, according to the dollar index.

October crude oil futures added 69 cents to settle at $99 a barrel and December gold futures rose 60 cents to settle at $1,772.70 an ounce.

The U.S. economic news was mixed once again but a much better-than-expected read on consumer sentiment and some positive data on business inventories outweighed a spate of tepid economic reports.

The preliminary University of Michigan Consumer Sentiment Index rose to 79.2 for September from 74.3 in August. Economists were bracing for a retreat to 74. The surprise jump, which put the index at a four-month high, was attributed to Americans becoming more optimistic about the labor market and economic outlook.

The Census Bureau, meanwhile, said that business inventories rose 0.8% in July, better than the average economist prediction of a 0.3% gain and their biggest increase in six months, driven by a rise in auto stockpiles; boding well for third-quarter economic growth figures.

The Federal Reserve said industrial production fell 1.2% in August after rising 0.5% in July as Hurricane Isaac restrained output in the Gulf Coast region at the end of August and manufacturing output decreased 0.7%. Economists estimated a 0.2% decline in industrial production last month.

Capacity utilization for total industry moved down a percentage point to 78.2%.

Also, the Census Bureau said retail sales rose 0.9% in August after increasing by a downwardly revised 0.6% in July. On average, economists were expecting retail sales to gain 0.7%.

Although the headline number was quite strong, given the rebound in gasoline prices, overall, "this has to go down as a weak report," said Paul Dales, senior U.S. economist at Capital Economics. "Most of the spending in August was on products that households have to buy, such as gasoline, not items they like to buy, such as new TVs."

In addition, the Bureau of Labor Statistics announced the consumer price index for August increased 0.6% after being unchanged the prior month, driven by the jump in the gasoline component, and the core measure factoring out the food and energy components rose 0.1% for the second month in a row.

Economists expected the CPI to rise 0.5% in August and the core CPI to advance 0.2%.

In corporate news, Ford's board may name CEO Alan Mulally as non-executive chairman to keep him involved with automaker after he leaves the top post, a person familiar with the matter told Reuters.

Shares gained 1.8%.

Several private-equity firms are considering a buyout offer for Staples , according to a report from Fortune. Among the firms is Bain Capital, which helped launch the office superstore 26 years ago.

Discussions have been preliminary thus far, with sources saying the earliest an actual offer could come would be late in 2012, Fortune reported.

Shares spiked 2.1%.

Neuralstem shares were off more than 9% after the biotech company announced the pricing of a registered direct offering of 7 million shares of its common stock at a price to the public of $1 a share.

Analogic shares were popping more than 12.5% after the tech firm specializing in medical imaging and security systems reported fiscal fourth-quarter earnings that more than doubled and blew pass Wall Street estimates.

--Written by Andrea Tse and Joe Deaux in New York.

>To contact the writer of this article, click here: Andrea Tse.