World Weighs on Stocks After Jobs Data Surge

January's jobs data gave the stock market a jolt higher early Friday. But the advance proved short-lived, as has every rally of late. Traders reassessed the economic data while a raised terror threat indicator by the government and ongoing geopolitical concerns further weighed on sentiment.

As of 2:05 p.m. EST, the Dow Jones Industrial Average was down 0.9% to 7855.25, after having traded as high as 8001.08. The S&P 500 was lower by 1% to 829.84 vs. its earlier best of 845.73, and the Nasdaq Composite was down 1.2% to 1285.50, after having traded as high as 1314.50.

Drugmakers such as Merck ( MRK) and Pfizer ( PFE) were among drags on major averages; the Amex Pharmaceutical Index was lately down 1.7%.

However, Scios ( SCIO) was lately up 19.6% after The Wall Street Journal reported Johnson & Johnson ( JNJ) is in talks to buy the biotech firm. JNJ was down 1.3% but the Amex Biotech Index was up 0.9%.

The Labor Department reported nonfarm payrolls rose by 143,000 in January vs. the consensus estimate of 69,000. The unemployment rate fell to 5.7% from 6.0% in December vs. expectations for a repeat last month. The overall workweek was up 0.1 hours to 34.2 hours, and average hourly earnings were unchanged.

While the headline numbers were positive and initially deemed bullish, there were some wrinkles. First, December's job loss was revised downward to 156,000 from 101,000 previously. Also, the bulk of the January job gains were in retail, where payrolls rose by 101,000, the largest gain since January 1995.

The retail sector's gain "reflects a weak holiday season which implied below-normal hiring late last year, which became a seasonally-adjusted decline, and below-average layoffs in January, which became seasonally-adjusted gains," commented Peter Kretzmer, senior economist at Banc of America Securities.

"The employment report for January showed some positive signs for labor markets and the economy, but the headline changes likely overstate the degree of underlying improvement in the month, and we do not see the report as a clear turning point in the recovery," he said.

Perhaps such assessments helped quell the early enthusiasm among buyers, although stocks didn't really turn south until the 10 a.m. EST release of the December wholesale inventories report.

Wholesale inventories rose 0.8% in December, their largest rise since June 2000 and vs. economists' expectations for a 0.2% gain. Meanwhile, December sales fell 0.8%, the biggest drop since October 2001, and November's inventory gain was revised upward to 0.3%.

The inventory-to-sales ratio remains low at 1.23, but rising inventories plus falling sales does not indicate a likely need for increased production to restock inventories.

Late morning, at about 11:30 a.m. EST, the government raised the domestic threat indicator to its second-highest level, orange. In a subsequent press conference, Attorney General John Ashcroft cited "specific intelligence received and analyzed by the full intelligence community."

On Thursday, the State Department issued a warning to Americans abroad, citing the threat of terrorist attacks by al-Qaeda.

"Terrorist use of non-conventional weapons, including chemical or biological agents must be considered a growing threat," the State Department said.

Of course, tensions remain high regarding the prospect for war with Iraq, as well as over the situation in North Korea. President Bush said Friday that "all options are on the table" for dealing with Kim Jong-il's regime, but that "I believe we can solve this diplomatically."

Bush said he spoke with Chinese President Jiang Zemin in the hopes of enlisting that nation's help in peacefully resolving the crisis.

As with stocks, the dollar surrendered its early gains, particularly vs. the euro. The U.S. Dollar Index was lately down 0.18 to 99.64.

"With war drums beating loud and clear, and tensions running high in both Iraq and North Korea, the dollar could be poised for another drubbing," warned Anne Mills, senior economist and currency strategist at Brown Brothers Harriman.

That said, Mills also observed the "technical picture going forward isn't pretty" for the euro vs. the greenback. In London trading, the euro breached support at $1.0770, she noted. Although the single currency has since bounced back into its trading range, "a sustained break below this level would be very negative for the euro, suggesting a run to previous support at $1.0500."

The price of the benchmark 10-year Treasury note was up 4/32 to 100 18/32, its yield falling to 3.93%.

Oil futures were up 2.7%, to $35.07, just off two-year highs reached earlier in the session.

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