Stocks Hammered by Weak Jobs Report

The Nasdaq was especially hard hit after disappointing December employment data fueled recession fears

Job creation slowed and the unemployment rate rose to 5% last month, news that punished stocks on Friday.

U.S. nonfarm payrolls were up just 18,000 in December, from increases of 115,000 in November and 170,000 in October. The much-anticipated report was seen as a key test of the economy's strength going into the new year. The unemployment rate moved from 4.7% to 5%, the highest in two years.

"This just adds further evidence that we are skating dangerously close to recession," says Phil J. Orlando, chief equity market strategist at Federated Investors FII. "The market is correctly spooked."

On Friday, the tech-heavy Nasdaq composite index was hurt the most, dropping 98.03 points, or 3.77%, to 2,504.65. Tech stocks had outperformed the rest of the market more recently. The Dow Jones Industrial Average was off 256.54 points, or 1.96%, to 12,800.18. The broad S&P 500 index fell 35.53 points, or 2.46%, to 1,411.63.

It's been a tough start to 2008, with the Nasdaq down 5.6%, the Dow off 3.5% and the S&P 500 3.9% in just the first three trading sessions of the year.

According to Friday's jobs report, the manufacturing sector loss 31,000 jobs, construction employment dropped 49,000, while service production jobs rose 93,000. Average hourly earnings were up 0.4% and the average workweek was steady at 33.8 hours.

"The labor market ended 2007 with a thud," said Ryan Sweet of Moody's Economy.com. The report's data are "recession-like," he wrote, adding the Federal Reserve needs to take aggressive action by cutting interest rates.

Charles Dumas of Lombard Street Research thought the market made too much of the news. The jobs data are "less bad than meets the eye," he wrote. "The market's obsession with the backward-looking" December report "continues to cause overreaction to the headline figure."

For every 24 stocks falling on the New York Stock Exchange, just seven moved higher Friday. On the Nasdaq, the ratio was 25 to 6 negative.

For the third day in a row, traders closely watched the price of oil, which briefly hit the $100 per barrel mark on both Wednesday and Thursday before pulling back. But on Friday, oil prices fell as traders took profits and the weak jobs report raised fears of an economic slowdown, which could hurt energy demand, Action Economics says. February NYMEX oil was down $1.27, trading at $97.91 per barrel.

Among the stocks in the news on Friday, Bed Bath & Beyond (BBBY) reported earnings of 52 cents, vs. 50 cents a year ago as total sales rose 11%. Next quarter's earnings are expected to be 64 to 67 cents per share, with flat same-store sales.

In yet another sign of the stress on financial institutions, Regions Financial Corp. (RF) said it will increase its loan loss provision by $270 million to $360 million in the fourth quarter. The reason is weak credit quality, especially loans to residential builders, the bank said.

Also, Irwin Financial Corp. (IFC) said it expects a fourth-quarter loss due to the weak mortgage and housing markets. It says it will report more non-performing loans due to weak residential real estate in Midwestern and Western markets.

Arctic Cat (ACAT) cut its sales forecast on lower-than-expected sales of all-terrain vehicles. The firm expects a loss of 55 to 60 cents in its third quarter, mostly due to a reduction in snowmobile production.

Chicago Bridge & Iron (CBI) says it won a $60 million contract to build a jet fuel facility in Thailand.

Talbots (TLB) says sales so far this quarter at Talbots and J. Jill stores aren't meeting expectations. Also, the firm plans to exit its Talbot kids and mens concepts by September. Total revenue could be cut by $100 million, the retailer says.

Longs Drug Stores (LDG) reported December same-store sales fell 1.5%.

The European indexes fell Friday. In London, the FTSE 100 index was off 2.02% to 6,348.50. Paris' CAC 40 index dropped 1.79% to 5,446.79, and Germany's DAX index lost 1.26% to 7,808.69.

Asian stocks were mixed. Japan's Nikkei 225 returned from a long holiday to drop 4.03% to 14,691.41. Hong Kong's Hang Seng index rose 2.35% to 27,519.69, and mainland China's Shanghai Composite was up 0.78% to 5,361.57.

Treasury market

Treasuries rose after Friday's employment report. The two-year note rose 05/32 to 101-01/32 for a yield of 2.724%; 10-year notes were up 13/32 to 103-14/32 for a yield of 3.839%; and the 30-year bond rose 11/32 to 110-26/32 for a yield of 4.348%.