By Pensions & Invesments 

Stocks fell today on news that the December employment report revealed the weakest labor market in four years, boosting expectations that the Federal Reserve may cut the funds rate by a half-point at its Jan. 30 meeting to prevent a recession.

The Dow Jones industrial average closed down 256.54, or 1.96%, at 12,800.18; the S&P 500 fell 35.53, or 2.46%, ending at 1,411,63; and the Nasdaq composite closed down 98.03, or 3.77%, at 2,504.65. All numbers are preliminary.

Treasuries surged, with the two-year note yielding 2.73%, a three-year low, and 152 basis points below the 4.25% funds rate. The 10-year note yielded 3.86%.

Fed funds futures now show a 55% chance of a 50-basis-point cut in the funds rate and only a 45% chance of a 25-basis-point cut, which pressured the U.S. dollar anew. On Jan. 2, the odds were 75% in favor of a small move and 25% of a greater one.

“The S&P 500 is exhibiting glaring weakness against the 13-week T-bill index and the Lehman Aggregate bond fund for the first time since 2003. … Bonds amazingly seem to have a good chance of outperforming stocks for a while to come,” said Chip Hanlon, president at Delta Global Advisors.

Overall payrolls grew by an anemic 18,000 in December but contracted by 13,000 in the private sector, while the jobless rate shot up to 5% from 4.7%. On Dec. 2, a key manufacturing index showed contraction in the sector.