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Stocks drop about 3% for week; China, Fed eyed

U.S. stocks closed more than 1 percent lower Friday ahead of a long weekend as uncertainty about the timing of a rate hike and Chinese economic growth continued to weigh.

The major averages ended off session lows but still logged losses of about 3 percent or more for the week.

"You've got a buyers' strike and a lot of buyers anxious to get out ahead of a long weekend, ahead of pent-up news out of China," said Art Hogan, chief market strategist at Wunderlich Securities.

Mainland Chinese stock markets reopen Monday after a four-day weekend and ahead of several regional reports on trade and inflation due next week. U.S. stock markets are closed Monday for the Labor Day holiday.

"I think it's a combination of continued jitters overseas," said Bill Stone, chief investment strategist at PNC Asset Management. "China was closed, but Japan wasn't. That and Europe set us off on a bad start."

European stocks extended losses to close more than 2 percent lower following the employment report. Mainland Chinese stocks were closed for a second straight day for a public holiday. The Nikkei closed down 2.15 percent. The Hang Seng declined 0.4 percent.

Stone noted the jobs report is also "probably not enough to settle the riddle on when the Fed will move." PNC expects a hike in September, or at least sometime later in 2015.

The Dow Jones industrial average closed about 272 points lower after earlier falling 348 points, with DuPont and Goldman Sachs the greatest blue chip decliners. Materials and financials lost more than 1.5 percent to lead all 10 S&P 500 sectors lower.

The S&P 500 closed on the edge of correction territory, off 10.00 percent from its 52-week high. The Nasdaq composite and Dow closed in correction territory.

"On balance I think the report was a good one, and if we weren't in the middle of market volatility and global turmoil we'd be set for a hike in September," said Liz Ann Sonders, chief investment strategist at Charles Schwab.

Major averages 1-month performance


The August nonfarm payrolls report showed that 173,000 jobs were created, missing expectations of 220,000. The unemployment rate fell more than expected to 5.1 percent, while average hourly wages increased more than expected by 0.3 percent, for a 2.2 percent gain over the past 12 months.

Strategists said a decline in unemployment and an increase in wages could support the Fed's case for a rise in rates. Analysts also noted the August preliminary jobs number is historically most prone to higher revisions due to seasonal factors.

"I think the report is stronger than the headline. As a result it probably gives the Fed what it needs to raise rates in September but it also gives it cover if it decides not to," said Kate Warne, investment strategist at Edward Jones. "It does provide of evidence that the economy continues to improve."

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Just ahead of the 8:30 a.m. EDT report, Dow futures were down about 140 points.

The dollar pulled back from a brief spike to trade mildly lower against major world currencies, with the euro higher above $1.11 and the yen stronger near 119 yen against the greenback.

In the Treasury market, the 2-year yield lost most of initial gains to trade near 0.69 percent. The 10-year yield held around 2.13 percent.

"The report was still mixed. There's something for everyone in the report," said Chuck Self, chief investment officer at iSectors. He noted upward revisions to July's figures, the lower unemployment rate and the increase in average hourly earnings as positives, while factors such as the relatively low participation rate were negatives.

"My view is that given the controversy... the Fed is going to wait to December. They don't want to cause disruptions," he said.

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"I think (the report) offers something for everybody but the markets don't like it," said Alan Rechtschaffen, financial advisor and senior vice president at UBS Wealth Management Americas.

"Inflation is just languishing," he said. Despite lower unemployment and slight gains in wages, Rechtschaffen said the bigger concern is China's effect on the plummeting commodity market and the potential deflationary pressures.

U.S. crude oil futures settled down 70 cents, or 1.5 percent, at $46.05 a barrel. The weekly Baker Hughes North American Rotary Rig Count showed a decline of 13 . Brent crude traded lower below $50 a barrel.

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Just prior to the release, Richmond Federal Reserve President Jeffrey Lacker—a known hawk—said at a breakfast the labor market no longer warrants zero rates. In a Reuters report he added that it is unlikely a weak unemployment report Friday would materially alter the labor picture or monetary policy outlook and that the biggest argument in favor of hiking rests on strengthening consumer spending.

U.S. stocks closed narrowly mixed Thursday, giving back sharp opening gains, as investors turned cautious ahead of the Friday morning report.

There were no major earnings due on Friday.

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The Dow Jones Industrial Average closed down 272.38 points, or 1.66 percent, at 16,102, with DuPont leading all blue chips lower. Merck was the worst performer for the week, off 6.8 percent. Intel was the only blue chip posting weekly gains, up 0.35 percent.

The Dow transports closed down 0.98 percent with Avis Budget leading most constituents lower.

The S&P 500 closed down 29.90 points, or 1.53 percent, at 1,921.23, with materials leading all 10 sectors lower. No sectors gained for the week, with utilities falling 5 percent as the worst weekly decliner.

The Nasdaq closed down 49.58 points, or 1.05 percent, at 4,683.92. Apple ended lower for a 3.55 percent weekly loss, down 1.01 percent for the year so far.

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 27.5.

About three stocks declined for every advancer on the New York Stock Exchange, with an exchange volume of 848 million and a composite volume of nearly 3.2 billion in the close.

High-frequency trading accounted for 49 percent of this month's daily trading volume of about 7.9 billion shares, according to TABB Group. During the peak levels of high-frequency trading in 2009, about 61 percent of 9.8 billion of average daily shares traded were executed by high-frequency traders.

Gold futures settled down $3.10 at $1,121.40 an ounce.