Stocks Fall amid Weak Economic Signals

The market fretted over signs of a slowdown in consumer spending. Next week's big events: Bernanke's testimony and the March jobs report

Major U.S. stock indexes closed lower Friday as the market absorbed more bad news on the economic front, including drops in J.C. Penney’s (JCP) first-quarter earnings guidance and the University of Michigan's consumer sentiment survey. Trading was light, with many investors hesitant to take on new positions ahead of next week's slate of economic releases, which includes the March employment report. Retail stocks were among the worst performers, accompanied by a slide in financial issues.

Bonds up were higher as a weak batch of economic data suggested the Federal Reserve might have to cut rates one more time in April. The dollar index eased. Gold and crude oil futures fell.

On Friday, the Dow Jones industrial average finished lower by 86.06 points, or 0.7%, at 12,216.40. The S&P 500 index fell 10.54 points to end at 1,315.22. The tech-heavy Nasdaq composite index shed 19.65 points, or 0.86%, to close the session at 2,261.18.

Activity in the broader market was negative amid slow trading. On the New York Stock Exchange, 21 stocks fell in price for every 11 that advanced. The ratio on the Nasdaq was 19-9 negative.

“Investors seem to be dipping their toes in the water and not liking the temperature,” says S&P chief technical strategist Mark Arbeter. “The technical reason for this type of action is that there was a tremendous amount of damage to many, many charts, and it simply takes time to repair the damage.”

What will Wall Street be watching next week? Fed Chairman Ben Bernanke goes up to Capitol Hill on Wednesday morning to testify before the Joint Economic Committee on the economic outlook. The overarching issue during Bernanke’s testimony will be the state of the economy, as more and more economic reports point to recession.

The JEC testimony will mark Bernanke’s first public appearance since the collapse of Bear Stearns (BSC) and the Fed’s Mar. 18 rate cut. Bernanke will have an opportunity to explain more fully the Fed’s latest innovative policy moves and its decisions on the handling of the mess at Bear.

On the data front, the Institute for Supply Management’s (ISM) index of manufacturing activity, due on Tuesday, and the ISM’s nonmanufacturing gauge, on tap for Thursday, will offer important information on whether the U.S. economy has slipped into recession.

Traders will also be glued to the release of the March employment report on Friday. Expectations are for no gain in payrolls and a small uptick in the jobless rate.

Wall Street was in the process of winding up one of its worst quarters in years amid some soft data. On Friday, an economic report showed the smallest increase in consumer spending since 2006. U.S. personal income rose 0.5% and spending rose 0.1% in February. Disposable income rose 0.5% and the U.S. savings rate moved into positive territory, from -0.1% to a 0.3% gain.

More encouraging to those worried about inflation, prices barely rose in February. The PCE deflator, a measure of inflation, and the core rate, which excludes food and energy, were both up just 0.1% for the month.

The University of Michigan reported that its consumer sentiment survey dropped to 69.5 in March -- below economists’ consensus view of 70.2 --from 70.8 in February. The index is now at its lowest level since 1992. Expectations slumped to 60.1 from

62.4, while estimates of current conditions improved to 84.2 from 83.8.

“The survey is not quite as dire as the Conference Board's Consumer Confidence survey released earlier this week, but is well into recession range,” says S&P Economics.

Consumer worries were evident in J.C. Penney’s report, in which it said sales are "well below expectations." The department store expects earnings of about 50 cents per share, down from the 75 to 80 cents it had predicted previously. Same-store sales in March could fall by double digits, the retailer said.

In the energy markets on Friday, NYMEX May WTI crude oil futures plunged $2.03 to $105.55 following reports that a bombed Iraqi pipeline had been repaired faster than anticipated.

Precious metals mostly skidded following an unsubstantiated rumor a commodities hedge fund had collapsed. Comex April gold futures plunged $18.20 to $930.60 per ounce in late trading.

Among stocks in the news Friday, KB Home (KBH) posted a loss of $3.47 per share last quarter, compared to profits of 34 cents per share a year ago, as revenue fell 43%. The homebuilder's quarterly report included a $223.9 million loss due to declining home prices.

Lehman Brothers on Thursday was the subject of rumors -- quickly denied by the company -- that it is facing financial trouble of the sort that afflicted Bear Stearns (BSC). But on Friday, a Citigroup analyst upgraded the stock from hold to buy. The analyst, Prashant Bhatia, said "access to liquidity is a non-issue" for Lehman.

Clear Channel Communications (CCU) warned that the $19.5 billion deal to take the company private may not close, because the private equity buyers are having trouble securing financing from banks.

Red Hat (RHT) posted better than expected fourth-quarter non-GAAP earning s per share of 20 cents, vs. 16 cents one year earlier, on a 27% revenue rise.

Shares of Apollo Group (APOL) plunged after the for-profit education company reported a second-quarter loss of 19 cents per share vs. 35 cents EPS one year earlier as the inclusion of estimated litigation charges offset a 14% revenue rise. The company posted non-GAAP EPS of 48 cents, which was below the Wall Street consensus view of 52 cents.

Shares of Tiffany (APOL) fell after Merrill Lynch downgraded its rating on the jeweler to sell from neutral.

European markets finished lower Friday. In London, the FTSE 100 index fell 0.43% to 5,692.90, while Germany's DAX index shed 0.28% to 6,559.90, and France's CAC 40 index declined 0.5%, to 4,695.92.

Japan's Nikkei 225 rose 1.71% to 12,820.47, while Hong Kong's Hang Seng index gained 2.74% to 23,285.95.

Treasury market

Treasuries rallied as a tame prices component for the February core personal consumption expenditure eased inflation concerns. A weaker final reading on March University of Michigan consumer sentiment contributed to the bullish backdrop for bonds. The 10-year note rose 20/32 to 100-16/32 for a yield of 3.44%. The 30-year bond climbed 26/32 to 100-24/32 for a yield of 4.33%.

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