S&P 500 Posts Best Closing High Since Financial Crisis; Up 4.6% for Week

Stocks finished higher Friday, with the S&P 500 posting its highest close since December 2007, following a better-than-expected ISM non-manufacturing index and a monthly government jobs report that showed gradual improvement in the labor market.

All three major averages posted their best weekly gains since December 2011.

The Dow Jones Industrial Average gained 43.85 points, or 0.33 percent, to end at 13,435.21, led by Alcoa and Disney.

The S&P 500 added 7.10 points, or 0.49 percent, to finish at 1,466.47. And the Nasdaq eked out a gain of 1.09 points, or 0.04 percent, to close at 3,101.66.

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell below 14, posting its worst weekly loss in at least 26 years, plummeting nearly 40 percent.

For the week, the Dow rallied 3.84 percent, the S&P 500 jumped 4.57 percent, and the Nasdaq soared 4.66 percent. Hewlett-Packard was the best weekly performer on the blue-chip index, while UnitedHealth was the only stock in the red.

All key S&P sectors finished in positive territory for the week, led by financials and telecoms.

Stocks surged earlier this week, as Wall Street cheered the last-minute budget deal by lawmakers to avert the fiscal cliff that would have pushed the economy into recession.

"We're now focusing on what's to come on the spending side—there's the potential that this could look like the summer of 2011," said Paul Hogan, portfolio manager of the FAM Equity-Income Fund, referring to the debt ceiling negotiations. "We had a good week for stocks following the outcome of the cliff negotiation—whether good or not, the uncertainty is removed on that particular issue."

On the economic front, U.S. employers added 155,000 jobs in December, according to the Labor Department, mostly in line with analysts' expectations and slightly below the level for November. The unemployment rate edged higher to 7.8 percent.

"[The number] was a bit disappointing to those who thought the ADP data was a reliable tell of a stronger number," wrote Marc Chandler, global head of currency strategy at Brown Brothers Harriman. "However, the details were stronger than expected...The manufacturing sector remains a key bright spot for the U.S. economy. Upward revisions added another 38,000 jobs, which if added back to the headline, would be close to the 200,000 increase that some economists forecast."

The services sector grew at its fastest pace in 10 months in December, according to the Institute for Supply Management. Meanwhile, factory orders were flat in November, according to the Commerce Department.

Stocks finished slightly lower Thursday, as investors became nervous that the Federal Reserve could take action to end bond purchases earlier than expected. Still, all major indexes are still on track to finish sharply higher for the week. (Read More: Why Central Banks Still Hold All the Cards in 2013 )

Meanwhile, St. Louis Federal Reserve President James Bullard told CNBC that the Fed embarked on a third round of quantitative easing too early and that he would have waited in case the global economy deteriorated more significantly. Bullard is a voting member this year. (Read More: Hey Market, Chill Out: Fed's Not Going Anywhere )

Samsung Electronics is expected to widen its lead over rival Apple in global smartphone sales in 2013 with a 35 percent growth, according to Strategy Analytics. Apple shares declined 2 percent, putting a damper on the Nasdaq.

Citigroup rose after Goldman Sachs added the bank to its "conviction buy" list. Meanwhile, JPMorgan was removed from Goldman's "conviction buy" list, though the brokerage still rates the stock a "buy."

Lululemon slumped after the sports apparel retailer was downgraded to "neutral" from "outperform" at Credit Suisse.

Chipmakers including Intel, Advanced Micro Devices and Texas Instruments were mixed even after the Semiconductor Industry Association reported that November sales were up 2 percent from a year earlier, marking 2012's first year-over-year gain for the industry.

Alcoa and Wells Fargo are scheduled to report quarterly results next week, kicking off the fourth-quarter earnings season.