Rate Fears Sink Stocks

The jobs report suggests the Fed will continue hiking, sending the averages lower.
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Updated from 4:29 p.m. EDT

Stocks closed lower Friday and had a losing week overall as traders worried that a red-hot labor market will prompt the

Federal Reserve

to keep hiking interest rates.

The

Dow Jones Industrial Average

I:DJI

fell 52.07 points, or 0.49%, to 10,558.03, and the

S&P 500

(SPX)

was down 9.44 points, or 0.76%, to 1226.42. The

Nasdaq Composite

(NASDAQ)

slipped 13.41 points to 2177.91.

Over the final two sessions of the week, the Dow lost 139 points, or 1.3%; the S&P 500 fell 19 points, or 1.5%; while the Nasdaq slid 39 points, or 1.8%.

"Higher energy prices and higher interest rates have finally created an issue for stocks over the last two days," said Paul Nolte, director of investments of Hinsdale Associates. "I think we've gotten to the end of the earnings season, so we're not so fixated anymore. The market is starting to realize that the economy isn't slowing down. The Fed definitely will be raising rates and now people are starting to consider it may be more than expectations in order to slow things down."

Trading volume on the

New York Stock Exchange

was 1.50 billion shares, with decliners beating advancers by a 3-to-1 margin. Volume on the Nasdaq was 1.49 billion shares, with decliners outpacing advancers 2 to 1.

The 10-year Treasury was falling 18/32 in price to yield 4.39% after the latest jobs data, while the dollar was firmer against the yen and euro.

"The market is still experiencing profit-taking," says Barry Hyman, equity market strategist with Ehrenkrantz King Nussbaum. "Stronger sectors like technology have been under pressure. The more impressive news through the jobs report unfortunately reflects the need for the

Federal Reserve to raise rates beyond their August meeting. But again, we've had a three-week rally chasing sectors that were straight up, and that screams for consolidation."

The Labor Department said the economy added 207,000 jobs in July, ahead of the consensus estimate that 180,000 jobs were created. The unemployment rate matched the consensus view at 5%. Job growth for May and June was revised upward by a total of 42,000.

One part of the report that gave traders pause was the growth in average hourly earnings, which had its biggest gain in about a year. That number was up 0.4%, and it contributed to the fear that the Fed would find justification to continue its rate-tightening campaign.

"There's a risk that the Fed may keep raising rates, given the jobs report we got today," says Michael Sheldon, chief market strategist with Spencer Clarke LLC. "This is what investors will be focusing on the next few days.

"It looks like a strong number, especially with upward revisions, when you include May and July," he added. "The increase in average hourly earnings was higher than expected, leading to some weakness in the bond market following the report."

September crude, which added 52 cents Thursday, finished up another 93 cents to $62.31 a barrel, just 19 cents short of its all-time high. Crude prices tacked on 2.9% for the week.

Stocks fell sharply Thursday as weak retail sales and the oil spike sowed doubt about the pace of summer expansion, with the Dow losing 0.8% to 10,610, the S&P 500 shedding 0.7% to 1236 and the Nasdaq losing 1.2% to 2191.

For the week, the Dow lost 0.78% and the S&P 500 was off 0.63%. The Nasdaq fell 0.32% this week.

Chinese search engine

Baidu.com

(BIDU) - Get Report

, which raised $109 million in the company's IPO, rocketed higher Friday. Shares, which sold for $27 apiece late Thursday, finished up $95.54, or 353.9%, to $122.54 on volume of 22.5 million shares.

Viacom

(VIA.B)

reported a strong quarter late Thursday, saying second-quarter profit rose 6% from a year ago to $762 million, or 47 cents a share, beating estimates by a penny. Sales of $5.88 billion also beat forecasts. Viacom rose 13 cents, or 0.4%, to $34.

Two months after roiling Wall Street with a profit warning,

Pixar

(PIXR)

delivered second-quarter revenue Thursday that missed estimates. The animation studio earned $12.7 million, or 10 cents a share, on $26.4 million in sales. Analysts were expecting 10 cents a share on about $31 million in revenue. Pixar climbed $3.33, or 8.1%, to $44.58.

Microsoft

(MSFT) - Get Report

reached into

Wal-Mart's

(WMT) - Get Report

ranks for an executive to run its marketing efforts. Kevin Turner, who most recently ran the Sam's Club warehouse unit, was named the software company's new chief operating officer Thursday. Microsoft shares rose 44 cents, or 1.6%, to $27.76. For the week, Microsoft gained 8.4%.

Auto-parts maker

Delphi

(DPH)

is in discussions with its unions and

General Motors

(GM) - Get Report

over a possible restructuring aimed at averting bankruptcy. Delphi lost about $400 million in the first quarter and expects more red ink through 2005.

J.P. Morgan upgraded Delphi to neutral from underweight after the news, believing in the company's potential restructuring plans. Still, the stock fell 14.2%, down 82 cents to close at $4.96.

Earnings news was light Friday. One of a few companies to report,

Cardinal Health

(CAH) - Get Report

posted fiscal fourth-quarter earnings of $287.2 million, or 66 cents a share, down from $393.5 million, or 90 cents a share, a year ago. Excluding items, earnings from continuing operations were 78 cents a share. Revenue rose 15% from last year to $19.5 billion. Analysts expected Cardinal Health to earn 89 cents a share on revenue of $19.3 billion, according to Thomson First Call. The stock finished up 23 cents, or 0.4%, to $59.22.

Westwood One

(WON)

reported second-quarter net income of $23.1 million, or 25 cents a share, down from $25.1 million, or 26 cents a share, a year ago. Revenue rose 1.6% to $141.8 million. The Thomson First Call consensus was for EPS of 27 cents on revenue of $143.6 million. Westwood One was lower by 55 cents, or 2.7%, to close at $19.65.

Elsewhere, Wachovia Securities downgraded

Toll Brothers

(TOL) - Get Report

to market perform from market outperform, citing the stock's valuation, disappointing third-quarter orders and a slowdown in the Washington-area market. The cut comes one day after Toll Brothers said third-quarter homebuilding revenue rose 55% from a year ago to $1.54 billion, the highest for any quarter in the company's history. Shares fell $3.93, or 7.2%, to $50.95.

Overseas markets were mixed, with London's FTSE 100 unchanged at 5314 and Germany's Xetra DAX losing 1% to 4827. In Asia, Japan's Nikkei lost 1% overnight to 11,766, while Hong Kong's Hang Seng fell 0.4% to 15,051.

To view Gregg Greenberg's video take on today's market, click here

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