Friday's trading was a mini-version of the market's performance over the past two weeks, with investors upbeat, then realizing there was little basis in reality for their resurgent confidence, then changing their minds again.
The market briefly came off its highest levels of the session after President-elect Obama reiterated at a news conference that there is a great deal of hard work to be done to restore the economy to health. Investors had optimistically sent prices higher, only to temporarily pull back when Obama underscored what they already know: that the economy's problems won't be easily solved.
George Shipp, chief investment officer at Scott & Stringfellow, said Obama appeared to be trying to telegraph to the market not to expect too much immediately. Obama, noting that he has until January before taking office, said he will work to support an economic stimulus plan and will seek ideas for helping the auto industry.
"My expectation is that he lowers the bar and buys the time," Shipp said. "Certainly there is no reason to create any undue expectations right now."
The market fluctuated after Obama spoke, then righted itself to close near its best levels of the day.
Hank Smith, chief investment officer at Haverford Investments said the market's turns aren't a surprise.
"I think it's absolutely part of the bottoming process," Smith said. "The Oct. 10 low has been tested again a number of times." The blue chips hit an intraday low of 7,882.51 on Oct. 10.
Friday's economic and corporate news reminded the market that the country could be in for a deep and protracted recession.
The Labor Department said the nation's employers cut 240,000 jobs in October, hurtling the U.S. unemployment rate to a 14-year high of 6.5 percent. The market had expected employers to cut 200,000 jobs and for the unemployment rate to rise 6.3 percent.
Meanwhile, Ford Motor Co. reported a $129 million third-quarter loss and announced plans to cut more than 2,000 additional white-collar jobs. General Motors Corp. said it lost $2.5 billion in the quarter and warned it could run out of cash in 2009. The struggling automaker also said it has suspended talks to acquire Chrysler.
Although the day's news was on its face worse than expected, investors were drawn by prices beaten down the past two sessions and some relief that the reports weren't more grim.
"We're coming off of a very oversold market that had already braced itself for bad news out of Detroit and certainly bad economic data in terms of the labor report," said Peter Cardillo, chief market economist at Avalon Partners.
The market is following the pattern of volatility that analysts warned would prevail for some time to come.
Obama's election was preceded by a big rally, during which the benchmark Standard & Poor's 500 index surged 18.3 percent in six sessions up through Tuesday. This was followed by a two-day loss of about 10 percent in the major indexes, including a 929-point drop in the Dow, as investors turned their focus once more to the economy's woes.
"There are three factors that are driving this market: psychological, fundamental and technical," Smith said. "The psychological is fear and panic. We've certainly seen that."
The fundamental factor is investors don't know exactly how the current credit crisis is going to affect the economy. And the technical factor that is playing in to the market is the forced selling from hedge funds and mutual funds that have to raise cash for redemptions, Smith said.
Nov. 15 is the cutoff for shareholders to notify fund managers of their intent to cash out investments before year-end, which means a sudden influx of "sell" orders could force funds into dumping more investments. Analysts expect this to continue to add to the volatility in the market.
The Dow rose 248.02, or 2.85 percent, to 8,943.81.
The broader S&P 500 index added 26.11, or 2.89 percent, to 930.99, and the Nasdaq composite index rose 38.70, or 2.41 percent, to 1,647.40.
The Russell 2000 index of smaller companies rose 9.95, or 2.01 percent, to 505.79.
Advancing issues outnumbered decliners by more than 2 to 1 on the New York Stock Exchange, where consolidated volume came to a light 4.80 billion shares, compared with 5.96 billion shares traded Thursday.
For the week, the Dow fell 4.1 percent, the S&P 500 index lose 3.9 percent, the Nasdaq slid 4.3 percent and the Russell fell 5.9 percent.
Paper losses for the week in U.S. stocks came to $500 billion, according to the Dow Jones Wilshire 5000 Composite Index, which reflects nearly all stocks traded in America.
Despite the gains Friday, investors have not lost sight of the potential for a deep and protracted recession. Obama will inherit an economy marred by a housing collapse, mounting unemployment, hard-to-get credit and financial market upheaval when he assumes office early next year.
Investors are watching closely for whom Obama selects as the next Treasury secretary, as well as whom he appoints to key Cabinet positions. Additionally, investors are mindful of how the government's $700 billion financial rescue package will be further implemented under a new administration. Obama met Friday with economic experts ahead of his press conference to discuss steps aimed at repairing the economy.
To provide fresh relief, House Speaker Nancy Pelosi said Democrats will push for another round of economic stimulus later this month.
The weak economic data on Friday reflect the freeze in the credit markets that began in mid-September following the bankruptcy of investment bank Lehman Brothers Holdings Inc., and the subsequent pullback in spending among fearful consumers. This has forced companies to cut jobs, said Michael Sheldon, chief market strategist at RDM Financial Group.
"Comments that we're hearing from CEOs when they report their earnings indicate that economic activity fell off the cliff," he said.
In other corporate earnings news, Sprint Nextel Corp. reported a loss of $326 million in the third quarter as it continued to lose customers. The nation's third-largest wireless provided had posted a profit in the year-ago period. Sprint dropped 31 cents, or 8.4 percent, to $3.37.
Investors fled General Motors following its quarterly reports but Ford advanced. GM tumbled 44 cents, or 9.2 percent, to $4.36, while Ford rose 4 cents, or 2 percent, to $2.02. The dollar fell against most other major currencies, while gold prices rose. Light, sweet crude rose 27 cents to settle at $61.04 a barrel on the New York Mercantile Exchange after falling sharply during the week.
The three-month Treasury bill's yield slipped to 0.28 percent from 0.30 percent late Thursday. A lower yield indicates increased demand. The yield on the benchmark 10-year Treasury note rose to 3.79 percent from 3.69 percent late Thursday.
Bank-to-bank lending rates fell again, though, suggesting that banks are more willing to lend to one another - a positive signal for the tight credit markets. The London interbank offered rate, or Libor, for three-month loans in dollars dropped for the 20th straight day by 0.10 percent to 2.29 percent, the lowest level since November 2004.
Overseas, Japan's Nikkei index fell 3.55 percent, and Hong Kong's Hang Seng Index rose 3.29 percent. Britain's FTSE 100 rose 2.17 percent, Germany's DAX index rose 2.59 percent, and France's CAC-40 rose 2.42 percent.
The Dow Jones industrial average ended the week down 381.20, or 4.09 percent, at 8,943.81. The Standard & Poor's 500 index finished down 37.76, or 3.90 percent, at 930.99. The Nasdaq composite index ended the week down 73.55, or 4.27 percent, at 1,647.40.
The Russell 2000 index finished the week down 31.73, or 5.90 percent, at 505.79.
The Dow Jones Wilshire 5000 Composite Index - a free-float weighted index that measures 5,000 U.S. based companies - ended at 9,358.30, down 410.34 points, or 4.20 percent, for the week. A year ago, the index was at 14,921.71.