Stocks start '07 with a whimper

NEW YORK (CNNMoney.com) -- Stocks ended the first week of 2007 on a sour note, after a stronger-than-expected jobs report prompted investors to bet that the Federal Reserve will not begin cutting interest rates anytime soon.

Investors were also likely to cash out following a strong rally in the second half of 2006.

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Fewer jobs for unemployed workers Unemployment claims rise Half of workers unhappy in their jobs Unemployment claims stuck above 400,000 State, local layoffs to hit record levels

The Dow Jones industrial average (down 82.68 to 12,398.01, Charts) lost 0.7 percent and the broader S&P 500 (down 8.63 to 1,409.71, Charts) index declined 0.6 percent.

The Nasdaq (down 19.18 to 2,434.25, Charts) composite sank 0.8 percent.

The Russell 2000 (down 14.08 to 775.87, Charts) small-cap index was particularly hard hit, losing 1.7 percent, after having risen more than 17 percent in 2006.

For the week, the Dow fell 0.5 percent and the S&P 500 lost 0.6 percent. The Nasdaq added 0.78 percent after a strong tech rally in Thursday's session.

The Labor Department reported that employers added 167,000 jobs to their payrolls in December, from an upwardly revised 154,000 in November, the government reported Friday. Economists surveyed by Briefing.com expected 100,000 jobs would be added.

The unemployment rate, generated by a separate survey, held steady at 4.5 percent, as expected.

Average hourly earnings, the report's inflation aspect, rose 0.5 percent from an upwardly revised 0.3 percent in November - more than what analysts were expecting.

"The report suggests that the consumer is starting the year on a good note, particularly when you combine it with the recent drop in oil prices," said Alan Gayle, senior investment strategist at Trusco Capital Management.

On a broader level, the report confirmed other recent readings that showed the economy is slowing but not heading for recession, and that inflation is perhaps not moderating enough for the Fed to start cutting rates just yet.

"The strength is likely to keep the Federal Reserve on the sidelines longer than has been priced into the bond market and bond yields are already moving higher today to reflect that change," Gayle said. "Stocks are reacting negatively to that increase in bond yields and the fact that the Fed may not lower rates soon."

The Fed has held the target for its key short-term interest rate steady at 5.25 percent at its last four meetings, and the minutes from the Fed's latest meeting, released earlier this week, showed policymakers are still concerned about rising prices.

The consensus among most market observers is that the central bank will leave interest rates untouched once more at its January policy meeting.

Federal Reserve Chairman Ben Bernanke was among a handful of central bank officials spoke publicly Friday, yet the central bank chief did not discuss the economy or monetary policy during a speech he delivered in Chicago.

Next week, investors will be paying close attention to November's wholesale inventory report on Wednesday and retail sales due out Friday.

Stock declines were broad-based, with 27 out of 30 Dow components sliding, led by techs IBM (down $0.89 to $97.42, Charts) and Intel (down $0.07 to $21.10, Charts). Other decliners included economically sensitive issues, such as Alcoa (down $0.35 to $28.76, Charts) and DuPont (down $0.65 to $48.05, Charts).

In addition to IBM and Intel, Motorola (down $1.61 to $18.94, Charts) led decliners after the cell phone manufacturer lowered its fourth-quarter forecast Friday due to a shortfall of mobile device sales.

But Best Buy (up $0.16 to $50.00, Charts) and Circuit City delivered some upbeat news from the retail sector, as the leading U.S. consumer electronics chains reported strong December sales at stores open at least a year. Circuit City (down $0.71 to $19.29, Charts) shares, however, fell 3.5 percent on concerns about competition.

After the closing bell, EMC Corp. (Charts) said it plans to cut 1,350 jobs and Hertz Global Holdings Inc. (Charts) also announced it was cutting about 200 jobs in the U.S.

And Fairchild Corp. (Charts), a maker of motorcycle clothing, helmets and accessories, said it would restate financial statements for its second quarter.

COMEX gold for February delivery slumped $19.30 to $606.90 an ounce. That sent gold stocks lower, with the Amex Gold Bugs (down $2.97 to $314.12, Charts) index losing nearly 1 percent.

Market breadth was negative. On the New York Stock Exchange, losers trounced winners by more than 3 to 1 on volume of 1.7 billion shares. On the Nasdaq, losers beat winners 3 to 1 on volume of 2.1 billion shares.

Treasury bond prices slumped, boosting the yield on the benchmark 10-year note to 4.65 percent from 4.62 percent late Thursday. Bond prices and yields move in opposite directions.

In currency trading, the dollar jumped versus the euro and pared some of its early losses versus the yen.

After tumbling about 8.5 percent in the past two sessions, U.S. light crude oil prices for February delivery rebounded, climbing 72 cents to $56.31 a barrel on the New York Mercantile Exchange, having been on both sides of unchanged throughout the session.

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