Stocks finish mixed at end of tough week
Investors recover from morning fears about the labor market and the economic slowdown thanks to rally in financial shares. Fannie and Freddie sink in after-hours trade.
NEW YORK (CNNMoney.com) -- Stocks ended mixed Friday after a tough session and week, as a rally in the hard-hit financial sector countered amplified recession fears that were sparked by a weak labor market report.
Bond prices edged lower, raising the corresponding yields, while the dollar strengthened versus the euro and yen. Oil prices settled at a five-month low, while gold and other commodity prices also declined modestly.
The Dow Jones industrial average (INDU) gained 0.3%, due to strength in financial components AIG (AIG, Fortune 500), American Express (AXP, Fortune 500), Bank of America (BAC, Fortune 500), Citigroup (C, Fortune 500) and JP Morgan Chase (JPM, Fortune 500).
The broader Standard & Poor's 500 (SPX) index gained 0.4% and the Nasdaq composite (COMP) lost a few points.
After the close, reports surfaced that the Treasury Department is close to announcing a plan to help troubled mortgage lenders Fannie Mae and Freddie Mac.
The plan, which could be announced as soon as this weekend, is expected to include a capital injection and changes to senior management at both firms, the Wall Street Journal reported. The two government-sponsored firms own or back about half the mortgage debt in the country. Fannie Mae (FNM, Fortune 500) shares fell 18% in extended-hours trading, while Freddie Mac (FRE, Fortune 500) shares lost 10%. (Full story)
Friday's market: All three major gauges fell through the morning Friday but managed to recover in the afternoon as the financial sector turned around. Financial stocks make up the second biggest sector in the S&P 500, after technology, so a rally can help improve the overall market.
Friday's action reflects the extreme volatility in the markets, said Phil Dow, director of equity research at RBC Wealth Management. It also reflects the impact of large trading firms that aren't strictly making decisions based on market fundamentals - or even in reaction to the day's economic news.
"Hedge funds and proprietary trading desks dominate," he said. "The daily news matters when it does, but then it doesn't."
The Dow has posted triple-digit losses in 51 sessions this year, according to Dow Jones. That's the worst record for the blue-chip barometer since 2002, when the Dow declined at least 100 points 67 times during the year.
"My sense is you are eventually going to see a rally when fundamentals turn around," said Phil Dow. "I don't think we'll turn positive on the popular indexes this year, but if you get any kind of progress on the credit crisis, maybe you can see some of this volatility dry up."
For the week, all three major gauges slipped. The Dow declined 2.8%, the Nasdaq lost 4.7% and the S&P 500 lost 3.2%
Stocks plummeted Thursday, with the Dow plunging 345 points as mixed retail sales, lower oil prices and dour labor market readings amplified worries about a global economic slowdown. The weak job market report Friday kept those worries front and center, although the selling pressure was pretty mild in comparison with other selling sessions.
"People were expecting it (the unemployment rate) to get over 6% by year end, but the speed by which it occurred was a surprise," said Ben Halliburton, chief investment officer at Tradition Capital Management. "Along with other recent economic news, it has raised worries that third-quarter GDP could be negative."
Slower economic growth transfers to slower corporate profit growth, and the jobs report only added to such worries, he said.
Next week brings a slew of relevant economic reports, but most are not due until the end of the week. The one early-week report of note will be the July pending home sales index on Tuesday. Other reports of note include two due on Friday: the August retail sales index and the producer price index, a measure of wholesale inflation.
Labor market weakens: The unemployment rate surged to a five-year high of 6.1% in August, as employers cut jobs from their payrolls for the eighth straight month amid the weak economy. Economists surveyed by Briefing.com had forecast the unemployment rate would hold steady at July levels of 5.7%.
"The jump in unemployment was a bit of a shock," said Jane Caron, chief economic strategist at Dwight Asset Management.
Caron said what is especially concerning is that the unemployment rate will likely go even higher in the next few months. That's largely because the rate typically peaks in the months after a recession has hit its low point, and the current sluggish economy isn't even technically in a recession much less near a low point.
"If we believe that the economy is in a recession and we think that the trough is in the fourth quarter of this year or first quarter of next year, that suggests the unemployment rate is going to go higher," she said.
Her current forecast is for an unemployment rate of 7% sometime in mid-2009.
At the same time, if the worsening trend in both the weekly and monthly jobless figures continues at the current pace, the downturn in the second half is going to be steeper than most economists think, she said.
Employers cut 84,000 jobs from their payrolls in August, according to the U.S. Labor Department, versus forecasts for 75,000 cuts. Employers cut 60,000 jobs from their payrolls in July. Through August, the U.S. economy has lost 605,000 jobs in 2008.
"The absolute number of job losses is not huge by historic standards, but the trend is not good," said Dow.
Average hourly earnings, the report's inflation component, rose 0.4% after rising a revised 0.4% in July. Economists were looking for average hourly earnings to rise 0.3%, on average. (Full story)
In other economic news, a record 1.25 million homes were in foreclosure during the second quarter of 2008, according to the Mortgage Bankers Association. (Full story).
And in Fed speak, San Francisco Federal Reserve Bank president Janet Yellen said in a speech late Friday afternoon that U.S. economic growth will be weak in the second half of 2008. Yellen is an alternate member of the FOMC's rate-setting committee this year and will be on the committee next year.
Company news: Goldman Sachs (GS, Fortune 500) downgraded fellow financial services company Merrill Lynch to "sell," citing the likelihood of further writedowns tied to bad mortgage bets.
Goldman also said it expects Merrill to post a bigger third-quarter and full-year loss than previously expected. Merrill (MER, Fortune 500) shares ended higher along with the rest of the financial sector, recovering from morning losses.
Nokia (NOK) warned that its third-quarter global market share will decline from second-quarter levels and that the global mobile device market will be hit by the weaker economy and consumer spending slowdown. Shares slumped 7.6%.
Dell (DELL, Fortune 500) is reportedly looking to sell some or all of its PC-manufacturing plants as a means of cutting costs, according to a report Thursday. Shares were little changed. (Full story).
UST (UST) rallied 25% after a published report said Altria Group plans to buy the smokeless tobacco company. However, Altria (MO, Fortune 500) dismissed the report as untrue.
Commodity shares declined, including Dow components Alcoa (AA, Fortune 500), Chevron (CVX, Fortune 500) and Exxon Mobil (XOM, Fortune 500).
Microsoft (MSFT, Fortune 500) was the Dow's biggest loser.
But the financial sector did an about-face, turning higher after a weak morning. That turnaround helped the broader market trim losses.
Market breadth was mixed. On the New York Stock Exchange, winners topped losers by a narrow margin on volume of 1.2 billion shares. On the Nasdaq, decliners beat advancers seven to six on volume of around 2.27 billion shares.
Fuel prices: U.S. light crude oil for October delivery fell $1.66 to settle at $106.23 a barrel on the New York Mercantile Exchange, after ending the previous session at a five-month low.
Prices have fallen more than $40 a barrel from a record high of $147.20 in July on bets that a sluggish global economy is cutting into demand. Investors have also been trying to determine the impact of Gustav, which struck this week in the Gulf Coast region that accounts for about 25% of U.S. oil production, as well as determine what threat there is from three storms in the Atlantic. (Full story)
Gas prices declined for a fifth straight day, according to a national survey of credit-card activity.
The recent decline in driving has cut into the federal Highway Trust Fund, prompting the government to ask Congress for an $8 billion emergency infusion Friday.
Other markets: In the bond market, Treasury prices gave up early gains and turned lower. The decline lifted the yield on the benchmark 10-year note to 3.64% from 3.62% late Thursday. Prices and yields move in opposite directions.
The dollar gained versus the euro, hitting its highest point against the European currency since October of last year. The dollar also hit its highest level against the British pound in two years. But the greenback was flat versus the yen.
COMEX gold for December delivery fell 40 cents to settle at $802.80 an ounce. 
