On Friday, the market initially took a sharp downturn after news that the U.S. has imposed trade sanctions on China and as tensions over a stand-off between Iran and the UK kept oil prices near $66 a barrel.
But stocks recovered some ground in the final hour of trading as oil fell. After a very choppy session, the Dow Jones Industrial Average finished up 5.6 points at 12,354, boosted by gains in the likes of Verizon Communications and Caterpillar Inc. .
For the quarter, the blue-chip average sits on a loss of 0.9%, its first quarterly decline since the second quarter of 2005.
The Dow first rose by over 65 points in morning trade Friday, before falling by over 100 points and then recovering some ground in the afternoon.
"Near-term, there are too many uncertainties," said Owen Fitzpatrick, head of the U.S. equity group at Deutsche Bank. "There are a lot of issues that aren't resolved about the housing market, subprime mortgages and geopolitical tensions."
Stocks have been rocked since late February amid mounting concerns that a meltdown in the subprime mortgage market will spread, restricting lending, cramping consumption and further weakening a slowing U.S. economy.
"The market is going to be in choppy waters, at least for the next couple of months," said Fitzpatrick. Next week, the market will be on the lookout for negative announcements from companies forced to ratchet down earnings outlooks, "given the weakness that we've already seen in the economy," he said.
The S&P 500 remained under water, losing 1.6 points to close at 1,420, but it posted a 0.2% gain for the first quarter. The tech-heavy Nasdaq Composite rose 3.8 points to 2,421 Friday, and advanced 0.3% for the quarter.
The final trading sessions of a quarter also typically bring so-called "window-dressing," when money managers try to fill their portfolios with winning stocks and ditch losing stocks.
U.S. sanctions stun market
Stocks and the dollar turned around in late morning trade, after the Commerce Department announced the sanctions in connection with a dispute over paper subsidies.
"We haven't seen the exact percentages yet, but this represents a 20-year break in U.S. trade policy and potentially a watershed in US/Chinese trade relations," said Brian Dolan, director of research at Forex.com. "The obvious impact is going to be felt in dollar/yen which is already collapsing."
The sharp drop in the dollar reflected concerns that China may sell, or simply stop buying, U.S. assets -- mostly Treasury bonds -- which could lead to a spike in interest rates and further weaken a slowing U.S. economy. There are also concerns that higher Chinese import prices might further hurt consumption.
"Anti-China protectionist legislation will backfire -- resulting in the functional equivalent of a tax hike on the U.S. consumer, as well as reduced Chinese demand for U.S. Treasurys," said Morgan Stanley chief economist Stephen Roach in a note Friday.
The sanctions against China "could restrict the market, if it becomes more of a battle," said Deutsche Bank's Fitzpatrick.
Trading volumes picked up, with 1.6 billion shares exchanging hands on the New York Stock Exchange and 2.1 billion trading on the Nasdaq stock market. Rising shares outpaced decliners by 9 to 7 on the NYSE and by 4 to 3 on the Nasdaq.
Tech shares received a lift after brokerage Stifel Nicolaus upgraded the chip sector to overweight from neutral. Stock upgrades in the group included Broadcom Corp. and Nvidia Corp. .
Milddle East tensions rise ahead of weekend
Investors were also kpt on edge about ongoing tensions between the UK and Iran, as the world's fourth-largest oil producer continues to hold 15 British naval personnel. The tensions kept the price of oil near $66 a barrel.
Crude oil futures still fell back 16 cents to close at $65.87 on Friday. But oil has rallied 6% over the past week and is up 4% for the month of March.
According to Frederic Ruffy, an analyst at Optionetics, oil received an earlier bid Friday after several media reports of escalating tensions with Iran ahead of the weekend.
A Reuters report said Iran has plans to stop selling oil in dollars completely.
And Debka, an Israeli military intelligence website, said that American investors in Bahrain have been advised to leave by U.S. army officers, who spoke of security concerns. The move was "a hint of an approaching war with Iran," Debka concluded.
News agencies said the White House has denied any knowledge of such events.
Earlier, Debka cited "intelligence sources in Moscow as predicting that a US strike against Iranian nuclear installations codenamed Operation Bite has been scheduled for April 6."
"While Debka has reported unfounded 'news' stories in the past, this particular story seems to be feeding speculation that the crisis is reaching a critical point, just before the weekend," said Optionetics' Ruffy.
Inflation rises, spending drops
Stocks earlier rose following news that the Chicago Purchasing Managers Index, a regional manufacturing report, was a much stronger than expected 61.7% in March. Wall Street economists expected a reading of 50.0%.
There was an earlier boost from key inflation data for February. Core consumer prices increased 0.3%, the fastest pace in six months, during February, even as consumer spending slowed to the weakest in six months, according to government data released Friday. Core inflation matched economists' expectations.
The report, which is the Federal Reserve's preferred gauge of inflation, comes two days after Fed Chairman Ben Bernanke told Congress that the central bank remains concerned about inflation.
Friday's inflation number, besides being in line with expectations, was also countered by a drop in consumer spending. Spending is a leading indicator of future economic conditions, while inflation is often a lagging indicator.
With oil rising closer to $70 a barrel, investors are increasingly concerned that inflationary pressures might keep the Fed on hold, while consumers' wallets are again pinched, said Paul Nolte, director of investments at Hinsdale Associates.
"Oil has reared its ugly head again," he said. "That's also putting pressure on the consumer, in addition to housing."
In other markets, gold futures rose $1.50 to $663 an ounce, lifted by the falling dollar and Middle East tensions.
Bonds closed little changed Friday after a volatile session, as safe-haven buying over tensions over Iran was offset by the stronger-than-expected manufacturing data. The benchmark 10-year Treasury bond finished down 1/32 to 99 26/32, yielding 4.648%.
By sector, oil shares , natural gas and banks fell the hardest, while biotechnology , real estate investment trusts and airlines advanced.
Friday also brought more deal news.
Los Angeles billionaires Eli Broad and Ron Burkle have made a last-minute offer for media giant Tribune Co. that tops Chicago investor Sam Zell's $8 billion offer by $1 a share, according to several media reports.
Investors will be waiting to see if a first-round of bids are finalized for the Chrysler unit of DaimlerChrysler .
Dow component United Technologies Corp. , meanwhile, offered to buy Rentokil Initial's electronic security division for $1.17 billion. Separately, The Wall Street Journal said that the company will sell its security-guard business in the U.K. and Australia in coming months.
Elsehere, Vodafone Group fell 3.7% on an update on its U.K. operations that implied margins may be worse than analysts have forecast.
TPG Capital kicked off an expected wave of European airline consolidation by making a $4.5 billion approach for Spanish airline Iberia, which is 10% owned by British Airways .
By Nick Godt