The silver lining in Thursday's shellacking is that equity traders no longer need to worry much about Friday's payroll report. Overblown fears from higher oil prices have knocked the market down so fast -- with the

Nasdaq Composite

off 10% since July 1 and the

S&P 500

down 4% -- there's a far-greater chance of a relief rally than another deep spill.

On Thursday, crude futures set another record close, the fourth in the past week, to finish at $44.41. That knocked the Nasdaq down 1.8% to 1821.63 while the S&P fell 1.6% to 1080.70 and the

Dow Jones Industrial Average

dropped 1.6% to 9963.03. Both the S&P and Comp set new closing lows for the year.

By the logic of the market, higher oil prices will put a damper on future consumer spending and corporate profits. So as oil has gained almost 15% since July 1, and reports showed lower consumer spending and confidence, investors have been discounting a lot of drag on economic growth.

But it's just an indication that growth already has slowed a bit if the Labor Department says less than the forecast 243,000 nonfarm jobs were added in July. Payrolls added an average of 304,000 a month in March, April and May before growing by just 112,000 in June. The June report, issued July 2, helped bonds rally and added to downward pressure on equities.

Now, there's considerable fear that the July data will come in below the forecast. And, as my colleague Rebecca Byrne

observed, there is some evidence from Challenger Gray's layoff report this week and other surveys that job growth hasn't picked up in July from June's surprisingly low level.

Then again, initial claims for unemployment insurance dropped by 11,000 last week -- twice as much as economists expected.

Whether you believe the jobs figures will come in high, low or right on target, the risks of the market's reaction are not equally balanced. Thursday's tailspin has already knocked valuations down to account for economic slowing. By contrast, investors haven't left much room in the calculus for brighter economic prospects.

Lehman Brothers has calculated that even before this week's selloff, the market was trading at a forward price-to-earnings ratio of less than 16 compared to the average of the past 10 years of 18.4; that's at a time when inflation and Treasury rates remain historically low and corporate profits exceptionally high. Also, one in five stocks in the S&P 500 lost at least 10% last month. That's the most to have lost at least that much in one month since December 2002, when nonfarm payrolls declined by over 200,000.

Given that backdrop, a much-bigger gain is likely from a positive surprise on jobs vs. a loss that might happen from a negative one.

Further bolstering the market if the report comes in light, it could be seen as compelling the

Federal Reserve

to slow its already "measured" pace of interest rate hikes. A weaker-than-expected jobs report would certainly prevent Alan Greenspan from upping the pace of tightening -- as he warned he might do in his July 20 congressional testimony. The Fed chairman said that if the Fed saw signs of fast growth, it might raise rates in a "less gradual manner."

As it is, eurodollar futures are indicating that the bond markets expect only another half-percentage point increase in the fed funds rate, to 1.75%, by year-end. A week ago, eurodollar futures indicated expectations of 0.75 percentage point of tightening.

A delay in the tightening cycle could give bank stocks some room to run after struggling since the beginning of April, when the first strong payroll report came out increasing fears of Fed hikes. The financial sector has been profiting by borrowing at the near-50-year-low short-term rate and lending and investing at much higher rates.

And there's still reason to believe that the price of oil, while volatile in the short term,

will be lower six months from now. The recent upward spike represents an increase three standard deviations higher than the 20-year average price, according to Morgan Stanley analyst Ben Funnell. Over that period, every time oil moved up even two standard deviations it quickly peaked and fell by $15 a barrel.

Higher commodity prices generally fit with the picture of an improving economy that also should be causing bonds to trade off. That means the rally in bonds that brought the yield on the 10-year Treasury note down to 4.40% Thursday from over 4.80% back in May won't last much longer.

The Fed's super-low interest rate regime, with short-term rates two percentage points below the rate of inflation, has allowed bond investors to do just fine despite the economic recovery, according to Pimco's leading fed watcher Paul McCulley. Pimco is expecting inflation to accelerate, which would be bad for long-term bonds and good for Treasury Inflation Protected Securities, known as TIPS.

"One thing that didn't make sense to a lot of us from a fundamental perspective in 2003 was that both bonds and commodities performed very well," he opined in a recent commentary on Pimco's Web site. "Longer term, we know that the commodity boat and the bond boat don't belong in the same lake."

However Friday's jobs report comes down, remember that the economy won't be floating all boats indefinitely.

In keeping with TSC's editorial policy, Pressman doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send

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