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Stocks Tumble, Led by Banks; Kraft Gains

Stocks were sharply lower Friday after a second straight drop in payrolls increased expectations of a slow economic recovery.

The Dow Jones Industrial Average was down more than 130 points, led by JPMorgan , ExxonMobil and AT&T .

Kraft and McDonald's were among the only Dow gainers.

The S&P 500and Nasdaqwere also lower. The CBOE volatility index, widely considered the best gauge of fear in the market, rose to nearly 23.

All 10 of 10 key S&P sectors were lower, led by financials, energy and industrials.

Health care and consumer staples fared better as some traders hedged their bets. Health care is on track to be the big winner for the week, with the sector up more than 3 percent since last Friday. Financials are on track to be the week's worst, but are down less than 1 percent.

U.S. employers cut 131,000 jobs from nonfarm payrolls in July. June payrolls were revised to show 221,000 jobs were lost that month, nearly twice the original estimate. The unemployment rate held steady at 9.5 percent.

Economists had expected to see payrolls drop by 65,000 in July and the unemployment rate to rise to 9.6 percent.

Jobs in the private sector rose by 71,000, after a 31,000 gain in June, while the government lost 202,000 jobs in July. Economists had expected private-sector jobs to increase by 90,000.

"The perception that there is job growth and an economic recovery is underway appears to be a myth," said Todd Schoenberger, managing director at LandColt Trading.

"The foundation for employment growth occurs in promising consumer sentiment and confidence readings — both of which continue to be frighteningly low," Schoenberger said. "Today's number does not initiate a Fed policy move, but the overall trend does."

Meanwhile, Goldman Sachs economists cut their forecasts for U.S. economic growth in 2011, saying GDP is likely to average 1.9 percent next year versus a previous forecast of 2.5 percent.

Next Tuesday, the Federal Open Market Committee meets to discuss monetary policy. While policy makers are widely expected to hold rates steady, traders will be watching for whether the Fed will resume buying mortgages and Treasurys.

Goldman said if the Fed starts reinvesting its money, it would be a "baby step" toward renewed unconventional easing.

Earnings were largely mixed across the board: AIG shares jumped more than 2 percent after the insurer reported better-than-expected results and said it had started talks on disentangling itself from the government.

Kraft Foods rose almost 2 percent after reporting higher-than-expected profitThursday. The food giant also raised its target for cost savings from the acquisition of Cadbury.

Meanwhile, Activision Blizzard tumbled more than 6 percent after the videogame publisher set a forecast for the current quarter that was below Wall Street's targets and raised fears about its just-released "StarCraft II" title.

Fannie Mae posted its smallest loss in three years as the government-sponsored enterprise and leader in the secondary mortgage market had lower credit expenses.

And Berkshire Hathaway shares slipped ahead of the company's earnings report, scheduled for after the closing bell.

BP rose after the firm said it finished pumping cement into its ruptured oil wellin the Gulf of Mexico on Thursday, paving the way to permanently plug the blow-out later this month.

To date, BP said it has paid more than $303 million in claims businesses and individuals affected by the spill, including $112 million paid in the last three weeks.

Oil prices fell more than 1 percent to below $81 a barrel. Meanwhile, gold prices rose, finishing out the week at $1,203.40 an ounce, its highest close in nearly a month.

Most gold mining firms were in the positive territory with Barrick Gold and Goldcorp both up more than 1 percent.

In tech news, Google shares were lower after the search engine giant announced their acquisition of social technology company, Slide.

Saudi Arabia and BlackBerry maker Research In Motion are making progress in talks over access to the device's encrypted network, a source close to the negotiations said, and the kingdom had yet to carry out threats to cut its Messenger service early Friday morning.

Apple may make a foray into China. The company is in talks to buy Handseeing, a Chinese software manufacturer, according to a Handseeing executive.

Teen retailers Aeropostale and American Eagle were under pressure after some negative analyst reports. UBS cut Aeropostale's price target to $28 from $33 with a "neutral" rating, while Wells Fargo cut American Eagle's rating to "market perform" from "outperform."

In IPO news, GM CEO Ed Whitacre said he expects the automaker's stock offering will meet strong demand once the company sells shares to the public. Whitacre wouldn't comment on timing of the sale.

On Tap for Next Week:

MONDAY: McDonald's sales figures; SEC vs. Fabrice Tourre hearing; Earnings before the bell from DISH Network and Liberty Media
TUESDAY: FOMC meeting, NFIB Small Business Optimism Index, Wholesale Trade data, Treasury 3-year note auction; Earnings after the bell the bell from Disney
WEDNESDAY: MBA purchase applications, international trade data, oil inventories; 10-year note auction; Earnings before the bell from Macy's and after the bell from Cisco
THURSDAY: Dell's annual meeting, jobless claims, import and export prices, 30-year bond auction; Earnings before the bell from Kohl's and after the bell from Nordstrom and Nvidia
FRIDAY: CPI, retail sales, consumer sentiment, business inventories; Earnings before the bell from JC Penney

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