updated 3/7/2004 5:21:53 PM ET 2004-03-07T22:21:53

With a relatively light roster of economic data and earnings reports on tap this week, Wall Street strategists expect stocks to move sideways as investors consider the long-term implications of news Friday that the U.S. economy created a scant 21,000 jobs in the month of February.

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The release of the much-anticipated February jobs report sent stocks into a flap Friday morning. The Dow Jones industrial average meandered within a 127-point range in the first few hours of trading, but eventually closed the volatile trading session barely changed from its opening level. Other stock indices traced a similar path.

While February's unemployment rate held at 5.6 percent, the jobs report showed employment growth in the month was surprisingly weak, falling far short of the 125,000 economists expected.

“I think we’re going to see a sideways market for a while because this was a big disappointment,” commented Peter Cardillo, chief stock market strategist at S.W. Bach. “Everyone was looking for job creation in excess of 125,000 in February and so this was a setback. It’s as if we’re knocking on a door that never opens for us.”

The jobs report has clearly thrown some doubt on the health of the U.S. economy, but analysts are divided over whether the gloomy report is good news or bad news for the stock market, now trading near two-year highs after a near yearlong rally.

Bond prices shot up after Friday’s jobs data, as traders made the assumption that a weak labor market will mean the U.S. Federal Reserve can afford to hold off on raising interest rates -- which are at record lows -- for a while longer, keeping firms’ borrowing costs low, which in turn will buoy profit growth and lead to higher stock prices.

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Bearish investors said Friday’s jobs report, which was the third disappointing monthly employment report in a row, could further weaken consumer confidence, which tumbled in February. That could lead to a decrease in consumer spending, which represents two-thirds of U.S. economic activity, and hurt stock prices.

“People are giving up on the idea that the Fed will raise rates any time soon, but there’s also a feeling is that if the economy isn’t adding any new jobs and the employment picture isn’t improving, it’s hard for consumer confidence to improve,” said Steve Stanley, an economist at RBS Greenwich Capital.

“Households are not getting an income boost from job growth," Stanley added. "And incomes need to keep growing to keep spending strong.”

The stock market may now place greater importance on monthly consumer confidence reports, Cardillo said.

“There’s a potential rally out there, but the market will probably be weak at best now," he noted. "But consumer confidence could give it a boost because if consumers are feeling good about the economy and the market they are likely to spend more and job creation will be less of a psychological hang-up for them."

There's also an important political dimension to the jobs report and it may have an impact on the stock market, Cardillo added. Although it’s a little early in the presidential election cycle, continually gloomy news about the job market could undermine President Bush’s re-election plans this November, Cardillo said.

“There’s a perception on Wall Street that Republicans are pro-business and so good news for the stock market,” Cardillo said. “We’re not seeing an impact yet from the election process, but as we get closer to the summer I think we will have an impact; it will become more of an issue in the months of May and June.”

Some investors see the gloomy jobs report triggering a modest correction in stock prices.

Richard Cripps, chief market strategist at Baltimore-based brokerage Legg Mason, told CNBC on Friday that with the unusual occurrence of stock and bond prices moving higher in tandem, as they did mid-session Friday, the market is reaching untenable levels and is primed for a pull-back.

“[Friday] was a microcosm for the market over the last few months: everyone’s a winner,” said Cripps. “Over the next three to four months we expect to see a correction of 10 or 15 percent.”

As investors ponder the market's next step this week, data on weekly jobless claims, consumer sentiment and retail sales will be scrutinized for any signs of weakness in the economy. But stocks are unlikely to make any significant moves until earnings outlooks for the current quarter arrive later this month, analysts said.

Investors will get a read on the job market and the mood of consumers from the government's reports on Thursday on weekly jobless claims and retail sales. On Friday, the University of Michigan will deliver its preliminary read on March consumer sentiment, which is expected to inch up to 95.0 from 94.4 in February.

On the earnings front, U.S. grocery chain giant Kroger is scheduled to report fourth-quarter results on Tuesday.

High-tech bellwether Oracle is slated to report results for its fiscal third-quarter on Thursday, and results from microchip firm National Semiconductor are expected the same day. Energy company El Paso is also due to report fourth-quarter earnings on Thursday.

At Friday's close, the blue-chip Dow industrials were up 0.11 percent for the week, while the broader Standard & Poor's 500-stock index was up 1.05 percent. The tech-heavy Nasdaq composite index was up 0.9 percent, breaking a six-week string of declines.

Reuters contributed to this story.

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