By Alison Griswold
NEW YORK (Reuters) - The S&P 500 ended Friday's session with its strongest first half of any year since 1998 after reaching record highs in May on a rally underpinned by the Federal Reserve's massive monetary stimulus.
While the S&P 500 closed down for the month of June on concerns that the Fed might begin reducing its bond-buying program, the benchmark index ended the second quarter with a gain - marking its first positive second quarter in four years. The Dow Jones industrial average and the Nasdaq also dipped in June, but rose in the second quarter.
"I think the momentum that was established at the end of the first quarter kind of gave us a phenomenal start," said Randy Billhardt, head of capital markets at MLV & Co. in New York.
"The low interest-rate environment has really been the foundation of the stock market performance for this second quarter."
The Dow and the S&P 500 fell in Friday's volatile session, ending three straight days of gains. At the closing bell, the Nasdaq had eked out a tiny gain. Stocks opened lower on weakness in technology shares, then fluctuated between steep losses and moderate gains for much of the day.
The losses were broad, with eight of the 10 S&P 500 industrial sectors declining. Only utilities and consumer discretionary shares closed higher.
Despite Friday's ups and downs, analysts said volatility has decreased as investors have come to terms with the fact that the Federal Reserve's stimulus program will eventually end. The CBOE Volatility Index <.VIX>, Wall Street's favorite barometer of investor anxiety, fell nearly 11 percent in the past week. In Friday's session alone, the VIX ended flat at 16.86.
Volatility surged last week after Federal Reserve Chairman Ben Bernanke suggested the central bank could slow its $85 billion a month in bond purchases before the end of the year if the economy is strong enough.
After two Fed speakers seemed to back away on Thursday from Bernanke's comments, Fed Governor Jeremy Stein and Richmond Fed President Jeffrey Lacker sounded a more aggressive tone on Friday on when the central bank's unprecedented policy accommodation might be reduced.
"The mixed signals from both the economic data and the Fed's direction have caused a lot of anxiety and some opportunistic buying and selling, and it's just created a much less predictive environment going forward," said Steven Baffico, chief executive officer of Four Wood Capital Partners in New York.
Both the S&P 500 and Nasdaq snapped a seven-month winning streak, while the Dow broke a six-month surge. For the month, the Dow fell 1.4 percent, the S&P 500 lost 1.5 percent and the Nasdaq dropped 1.5 percent.
Volume was the second highest of the year as some 10 billion shares changed hands on U.S. exchanges. Trading surged toward the close, with about half of the day's shares traded in the last 30 minutes as investors anticipated a final update from Russell Investments for the annual reconstitution of its indexes.
The Dow Jones industrial average <.DJI> fell 114.89 points or 0.76 percent, to end at 14,909.60. The S&P 500 <.SPX> slipped 6.92 points or 0.43 percent, to finish at 1,606.28. The Nasdaq Composite <.IXIC> added 1.38 points or 0.04 percent, to close at 3,403.25.
Before Friday, the three major U.S. stock indexes had climbed for three straight days on diminished concern that the Federal Reserve would bring an imminent end to its $85 billion a month in bond purchases, known as quantitative easing.
For the week, the Dow rose 0.7 percent, the S&P 500 gained 0.9 percent and the Nasdaq advanced 1.4 percent.
For the second quarter, the Dow gained 2.3 percent, the S&P 500 advanced 2.4 percent and the Nasdaq jumped 4.2 percent.
In Friday's session, Accenture PLC
U.S.-listed shares of Research in Motion
Arch Coal Inc
(Reporting by Alison Griswold,; Additional reporting by Rodrigo Campos; Editing by Jan Paschal)