Shares turned higher after a choppy start Friday as investors looked to adjust their positions ahead of the long Memorial Day holiday weekend.
Several retailers posted better-than-expected results including Sears, Gap and Aeropostale. The enthusiasm about retail helped outweigh concerns that bubbled up Thursday about the debt loads being taken on by governments.
The market's mood has turned decidedly more cautious this week as investors began to question whether a powerful two-month rally has been overdone. The benchmark S&P 500 index bounced off of 12-year lows in early March on hopeful signals of a recovery in the economy and is still up more than 30% since then. Many market watchers think there's more air to be let out of the balloon.
"Everything is overpriced," said Harry Rady, chief executive and portfolio manager of Rady Asset Management. "A very long, protracted recession is still very much alive."
Investors have been asking how the U.S. will pay for its programs to revive the economy and stabilize the banking system after a credit rating agency on Thursday issued a warning that Britain's credit rating could be lowered because its huge debt load is rising even faster than had been expected. Britain's government is playing a big role in bailing out that country's beleaguered banks.
Standard & Poor's warning on British government debt spilled over to the United States, which is also selling debt at a rate of billions per week to bankroll programs aimed at fighting the recession and propping up the U.S. banking system. That helped push the dollar to its weakest level against the euro since January.
"The crisis of deficit financing and deficit spending is moving its way up the food chain," said John Brady, senior vice president of global interest rate products at MF Global in Chicago. He said investors are worried about whether the economy will be able to recover if interest rates are higher and the dollar is weaker.
There were some bright spots among financials. Banks reduced borrowing from the Federal Reserve's emergency loan program over the past week, and investment banks didn't borrow at all during the week — the first time that's happened since early September.
The Dow's drop Thursday was its fourth in five days, but the blue chips began Friday's trading with a gain of 0.3% for the week because of a rally Monday.
Bond prices fell, pushing the yield on the 10-year Treasury note up to 3.40% from 3.37% late Thursday. The 10-year note is a widely used benchmark for home mortgages and other kinds of loans.
The dollar was lower against most other major currencies on worries over a possible downgrade to the U.S. government's credit rating. Gold prices rose about 1% as investors looked for safe assets.
Financial stocks mostly rose after the biggest bank failure of the year. Federal officials late Thursday seized Florida thrift BankUnited FSB in a move that is expected to cost the Federal Deposit Insurance Corp.'s insurance fund $4.9 billion. It's the costliest hit since last year's seizure of California lender IndyMac Bank that is estimated to have cost $10.7 billion.
BankUnited is the 34th federally insured lender to be closed this year and Florida's largest banking institution with about $13 billion in assets. A group of investors led by former North Fork Bancorp Chairman and CEO John Kanas bought the bank for $900 million.
In corporate news, Sears Holdings turned in an unexpected profit for its fiscal first quarter, rebounding from a loss a year earlier, as the retailer worked to manage inventory.
Gap reported better-than-expected earnings for the first quarter after the market closed on Thursday. It said sales at its less expensive Old Navy chain fell at a slower pace than a year earlier.
Campbell Soup said its fiscal third-quarter earnings fell sharply from a year earlier, when profits benefited from the sale of its Godiva Chocolatier brand. Excluding the sale, profits rose even as sales fell.
Oil fell 5 cents to $61 per barrel.
Overseas, Japan's Nikkei stock average fell 0.4%. In afternoon trading, Britain's FTSE 100 rose 0.5%, Germany's DAX index added 0.3%, and France's CAC-40 rose 0.5%.