U.S. Stocks Drop On Weak Jobs Growth; Bear Stearns Downgrade

NEW YORK (MarketWatch) -- U.S. stock losses mounted Friday after Standard & Poor's downgraded its outlook for Bear Stearns Cos. added to Wall Street's credit-related worries and the latest employment report showed weaker-than-expected jobs growth last month.

The pace of the market's decline quickened after a Bear Stearns' conference call about the impact of band home loans on its funds failed to reassure investors.

"They tried to put their best face on the situation but the market wasn't convinced," said Mike Malone, trading analyst at Cowen & Co.

"It wasn't long ago that Fridays were good in anticipation of more [leveraged buy-outs] and [mergers & acquisitions] over the weekend. Now there has been a shift in sentiment, with fear of bad news coming out over the weekend."

After shedding more than 200 points in the final 30 minutes of trade, the Dow Jones Industrial Average was off 175.8 points to 13,3278.1, with 27 of its 30 components trading lower. Dow loss leaders include American Express Co. , which was down 4.8%, and Alcoa Inc. , which fell 3%.

News that DaimlerChrysler AG had closed the sale of its Chrysler unit to Cerberus Capital Management helped stem Wall Street's losses for a brief period, with investors somewhat heartened by closure of the deal, which involved the underwriting banks covering $10 billion in loans after the subprime mortgage mess sapped demand for high-yield debt.

The S&P 500 and the Nasdaq Composite were 29.82 points lower at 1,442.38 and off 51.38 points at 2,525.01.

Volume at the New York Stock Exchange hit 1.8 billion, with declining stocks outpacing advancers 4 to 1.

At the Nasdaq, 2.1 billion shares were exchanged, with decliners ahead of advancing stocks 5 to 1.

Stocks lost ground on a "disappointing" employment report and anxiety about "Bear Stearns and their credit concerns," John Hughes, managing director at Epiphany Equity Research, told MarketWatch.

Stern outlook

The stock of Bear Stearns Companies Inc. fronted a large decline in the financial and brokerage sectors, its stock plunging 5.8% after S&P downgraded its outlook for Bear Sterns to negative.

Merrill Lynch & Co. Inc. fell 2.9%, while Dow component JP Morgan Chase Co. fell 2%.

Wachovia Corp., the fourth-largest U.S. bank, said its Vertice lending unit was temporarily pulling the plug on making "Alt-A," home loans, which fall between prime and subprime in quality, until market conditions improve. Its stock was off 1.15%.

Also taking a hit was the mortgage sector, with Countrywide Financial attempting to soothe liquidity concerns by announcing it has access to nearly $50 billion in short-term funding as a cushion. Its stock was off 6.2%.

Hit by bankruptcy concerns, American Home Mortgage Investment Corp. , fell 44% after the company said it will layoff more than 6,000 workers and stop taking mortgage applications.

The slumping housing market was also evident in Weyerhaeuser Co.'s second-quarter, with the world's biggest producer of timber for plywood reporting a near-90% drop in earnings for the June quarter. Its stock fell 1.2%.

Shares of lender IndyMac Bancorp. Inc. fell more than 10% after an email by Chief Executive Mike Perry to employees surfaced that described the mortgage-backed bonds market as "very panicked and illiquid."

Hard labor

The Labor Department reported that nonfarm payrolls grew by a lower-than-expected 92,000 in July, the lowest level since February.

In addition, the unemployment rate rose to 4.6%, the highest since January, Economists were expecting payroll growth of about 133,000, according to a survey conducted by MarketWatch. The jobless rate was expected to remain at 4.5%.

"This is not a positive catalyst for the market," said Art Hogan, chief market strategist at Jefferies & Co. "I think people are going to be a little shocked tha the unemployment rate inched higher last month."

The Institute for Supply Management reported non-manufacturing parts of the U.S. economy expanded at a slightly slower pace in July, with its gauge of the sector falling to 55.8% from 60.7% in June.

Stocks on the move

Shares of Dow component Procter & Gamble Co. fell 0.9%. The company reported a 19% gain in quarterly profit due to some new products and also said it will buy back up to $30 billion of its stock.

Toyota Motor Corp. reported a stronger-than-forecast profit on the back of a weak yen and better product mix. That stock rose 0.8%.

Oil slide

September crude closed at $75.48 a barrel, down $1.38 for Friday's session and down 2% for the week.

The jobs data also weakened the dollar. In New York trade, the greenback was quoted at 118.59 yen, vs. 119.23 yen late Thursday. The euro stood at $1.3740, compared with $1.3701.

Treasurys shot higher after the weaker-than-expected jobs report as these safe-haven assets generally benefit from signs of economic weakness. The benchmark 10-year Treasury note was 19/32 higher to close at 98-16/32 with a yield of 4.698%.

December gold climbed $7.80 to close at a more than one-week high of $684.40 an ounce as weaker-than expected U.S. jobs growth helped fuel investment demand. The contract finished the week with a gain of $12.10.

By Kate Gibson