Stocks, Bonds Hit Hard

Updated from 4:11 p.m. EDT

Rate fears and inflation anxiety wiped out the week's gains Friday as surging bond yields became too much for the bulls to bear.

The Dow Jones Industrial Average, which gained more than 40 points in the aftermath of a positive employment report, lost 96.46 points, or 0.86%, to 11,120.04. The S&P 500 fell 13.54 points, or 1.03%, to 1295.50, while the Nasdaq shed 22.15 points, or 0.94%, to 2339.02.

Of the 30 companies in the Dow, 27 closed lower. Alcoa(AA Quote), McDonald's(MCD Quote) and Verizon(VZ Quote) were the only names to escape the selloff.

For the week, the Dow edged up 0.11%, the S&P scratched out a 0.05% gain, and the Nasdaq edged lower by 0.03%.

Pressure built in stocks and bonds despite an absence of inflation pressures in the employment data, which showed payroll growth of 211,000 jobs in March and a benign 0.2% rise in average hourly pay. The 10-year Treasury bond was recently down 14/32 in price to yield 4.96%, its highest level since mid-2002. The 30-year bond yield breached 5% for the first time since 2004.

One negative for bonds was a decline in the unemployment rate to 4.7% from 4.8%, a trend that could bother Federal Reserve members who have cited rising capacity utilization as a potential inflationary catalyst. The central bank has raised the fed funds target rate at 15 straight meetings, lifting it in quarter-point increments to 4.75% from 1% in June 2004.

"I don't think the inflation fears are overdone; in fact, I think they're still underpriced with regard to the bond market," says Michael Darda, chief economist at MKM Partners. He says the rise in yields is actually a "healthy development" because it's closer to reality than what was priced in before.

Darda expects inflation and the fed funds rate to move higher than most people expect. "I would buy stocks on the weakness," he adds. "Stocks are strong relative to bonds ... and that's the comparison that matters."

To view Kara Wetzel's video take on today's market, click here.

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