updated 1/12/2004 9:29:44 AM ET 2004-01-12T14:29:44

A bad jobs report Friday halted Wall Street’s 2004 rally, sending stocks sharply lower as investors cashed in profits from the market’s recent advance. Regulatory problems for IBM and downgrades of telecommunications stocks also pulled stocks lower.

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Barry Berman, head trader for Robert W. Baird & Co. in Milwaukee, noted that the market held up relatively well through the day despite the early morning Labor Department report of anemic job growth in December.

But late in the day, “investors threw in the towel ... and everyone was taking profits,” Berman said.

The Dow Jones industrial average lost 133.55 points, or 1.3 percent, to close at 10,458.89, while the broader Standard & Poor’s 500-stock index was off 10.06 points, or 0.9 percent, at 1,121.86 at the close of trading.

The Nasdaq composite index, which had spent much of the day in positive territory, closed down 13.33 points, or 0.6 percent, at 2,086.92. The decline ended a five-session advance.

Despite Friday’s performance, all the indexes were up for the week. The Dow advanced 0.5 percent, the S&P rose 1.2 percent and the Nasdaq was up 4 percent.

The markets took little comfort from the Bush administration announcement that it was lowering the national terror alert level to “yellow” from “orange.” Homeland Security Secretary Tom Ridge said that an urgent threat had passed.

Before the market opened, the Labor Department said the nation’s unemployment rate dropped to 5.7 percent in December, but that companies added only 1,000 new jobs in an anemic holiday-hiring performance.

Analysts had been expecting a gain of 100,000 to 150,000.

Although December’s unemployment rate was the lowest in 14 months, it reached that level because fewer people were looking for work, the department said. More than 300,000 people gave up their search for jobs and dropped out of the pool of available workers, the department said.

Job creation is watched closely as a measure of the depth of the economic recovery from the 2001 recession and of consumer finances. Consumer spending makes up two-thirds of the economy.

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Charles H. Blood Jr., senior financial markets analyst at Brown Brothers Harriman & Co. in New York, said, “the market took the employment report badly at the start.”

He noted, however, that the jobs figures were at odds with other reports of economic expansion.

“Two months in a row like this would raise a real question,” Blood said. “One month, you have to decide if it’s telling the truth and the other ones are wrong, or visa versa.”

The jobs report also suggests the Federal Reserve is likely to keep interest rates lower longer to stimulate the economy.

The bond market responded strongly to the likelihood that interest rates will remain low, with the yield on the 10-year Treasury note falling to 4.082 percent from 4.25 percent late Thursday.

Shares of International Business Machines Corp. fell a day after the computer hardware company said federal investigators are considering civil charges for accounting rule violations.

IBM said the Securities and Exchange Commission was looking into the transactions as part of a larger probe into Dollar General Corp.’s accounting. The Tennessee-based chain of retail stores has admitted overstating profits by $100 million from 1998 to 2000.

IBM was down $1.83, or nearly 2 percent, at $91.21, while Dollar General dropped 22 cents, or 1 percent, to $21.45.

A few downgrades hurt the telecommunications sector.

AT&T Corp. fell 92 cents, or more than 4 percent, to $21.06 after Deutsche Bank analyst Viktor Shvets cut his rating to sell from hold. SBC Communications Inc. dropped $1.39, or more than 5 percent, to $26.20 after Merrill Lynch cut the stock to sell from neutral.

Telecom equipment maker Lucent Technologies Inc. was down 18 cents, or 4.6 percent, to $3.70 after Morgan Stanley downgraded the stock to equal-weight following what it called “significant outperformance.”

Although Ford Motor Co. on Friday projected increased profits in 2004, it fell 54 cents, or 3 percent, to $16.56.

Alcoa Inc., which swung to a fourth-quarter profit on improved productivity, was down $1.41, or 3.6 percent, at $37.25. Analysts worried the results were based on gains that won’t reoccur.

The Russell 2000 index of smaller companies dropped 4.42 points, or 0.76 percent, to 575.20.

Declining shares outnumbered advancing issues by about 5 to 4 on the New York Stock Exchange, where volume came to 1.66 billion shares.

Overseas, Japan’s Nikkei stock average closed up 1.18 percent. Major European exchanges registered declines: Britain’s FTSE 100 dropped 0.62 percent, Germany’s DAX index was down 0.72 percent, and France’s CAC-40 was off by 0.50 percent.

© 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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