The closer investors get to the government's July employment report, the more cautious they become.
Stocks slipped Wednesday as investors shied from making big moves ahead of the government's monthly reading on job losses and the unemployment rate, which comes out before the start of trading on Friday. The pullback, which took the Dow Jones industrials down 39 points, followed a 34-point gain Tuesday that was a slowdown from the previous day's triple-digit advance.
The big concern on Wall Street is layoffs, and whether companies trying to preserve their profits during the recession are continuing to slash jobs at a furious pace. Job cuts have to slow for the economy to have a solid recovery.
The caution in Wednesday's trading followed a disappointing report on the service sector during July. The Institute for Supply Management said its service index, a measure of the health of retail, financial services, transportation and health care companies, fell to 46.4 from 47 in June, marking the 10th straight monthly slide. A reading below 50 indicates contraction.
Still, there are plenty of signs of strength on Wall Street, and one is the fact that Wednesday's loss was so modest. Investors have been looking for the stock market to pause after it shot higher since mid-July. The market's occasional retreats have been mild in part because investors who missed the rally are looking to buy when prices dip.
The ISM report gave investors an excuse to cash in some gains after the furious buying of the past month. The Dow is still up 14% in just 18 days.
"The market has just had a pretty good advance and is looking for a reason for a pullback," said Henry Herrmann, CEO of investment management firm Waddell & Reed.
The Dow fell 39.22, or 0.4%, to 9,280.97. The Standard & Poor's 500 index fell 2.93, or 0.3%, to 1,002.72, while the Nasdaq composite index fell 18.26, or 0.9%, to 1,993.05.
Treasury prices fell after the government said it would auction $75 billion in notes next week. Some investors are worried that the government will have to entice buyers by offering greater returns. That would drive up interest rates and could make it harder for the economy to recover.
The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.76% from 3.69% late Tuesday.
Analysts said the drop in stocks was welcome because building on gains in a step-like fashion is more sustainable than a surge without breaks.
"It would only be natural to hesitate here as it tries to make up its mind as to what the next move will be," said Michael Sheldon, chief market strategist at RDM Financial.
The jobs report is a critical point for the market and could reshape ideas about the direction of the economy.
"The question is, even if it is a little bit strong, will it be enough to support an additional near-term advance in the markets given the run the equities have had over the past several sessions?" Sheldon asked.
Economists expect the report will show the jobless rate rose to 9.6% as employers cut 320,000 jobs last month, better than the 467,000 lost in June.
A private-sector report on unemployment Wednesday offered little encouragement ahead of the government data. The ADP National Employment Report, a closely watched precursor to the Labor Department's report, said employment fell by 371,000 in July — slightly more than anticipated — following a revised loss of 463,000 jobs in June.
There have been signs of improvement in manufacturing and housing but investors are still worried that rising unemployment will restrain consumer spending, which accounts for more than two-thirds of U.S. economic activity.
In better economic news, the Commerce Department said factory orders rose in June for the fourth time in five months. The 0.4% increase came after a 1.1% increase in May. Economists had been expecting a drop of 1%.
In other trading, the dollar was mixed against other major currencies.
Light, sweet crude rose 38 cents to $71.80 a barrel on the New York Mercantile Exchange.
The Russell 2000 index of smaller companies fell 4.75, or 0.8%, to 565.99.
Falling stocks outnumbered those that rose 8-to-7 on the New York Mercantile Exchange, where volume came to 1.9 billion shares compared with 1.2 billion Tuesday.
Overseas markets slid. Britain's FTSE 100 fell 0.5%, Germany's DAX index lost 1.2%, and France's CAC-40 shed 0.5%. Japan's Nikkei stock average ended down 1.2%.