The "soft patch" is back, and Wall Street is confused. The stock market's rally ran out of steam over the past week amid disappointing economic news, notably a weaker-than-expected report on US payrolls growth.
And while the slow-growth economic scenario had been welcomed in recent weeks as a boon for bonds and stocks, some now say the outlook is too soft for comfort on Wall Street.
The Dow Jones Industrial Average dropped 0.77 percent in the week to Friday to 10,460.97 and the Standard and Poor's 500 broad-market index shed 0.23 percent to 1,196.02.
The tech-heavy NASDAQ composite dipped 0.21 percent for the week to close at 2,071.43 on Friday.
The market had held up well for most of the week and appeared to be in position to sustain its rally after comments from a Federal Reserve official suggesting the central bank's rate-boosting cycle may be nearly over.
Richard Fisher, president of the Dallas Federal Reserve Bank, said in an interview with CNBC television: "We're clearly in the eighth inning of a tightening cycle ... We have the ninth inning coming up at the end of June."
The comments sparked a rally in the stock and bonds markets, leaving 10-year Treasury bond yields below four percent.
Analysts have been at a loss to explain the "conundrum" of low bond yields, which would normally signal an economic downturn or recession.
Adding to the confusion, Friday's report on US payrolls showed a mere 78,000 jobs created, well below expectations and a sign that economic momentum may be faltering.
"Just when we thought it was safe to say the economy had moved into a more consistent and solid job growth mode, we get this truly weird employment report," said Joel Naroff of Naroff Economics.
"Job growth of only 78,000 in May was, to say the least, disappointing. The economy has slowed from its strong pace but the data have been so strange and volatile that it is unclear its true condition."
Bob Doll at Merrill Lynch said the stock market has been helped by the bond market rally, but says this may not last.
"Treasury bonds have been in a bull market since March, which has helped drive the rally in equities, but yields are not likely to move down much further," Doll said.
"The leading economic indicators tell us that economic activity will likely decline or at least stop rising as quickly and that the domestic earnings picture will likely deteriorate ... While equity markets have continued to move up within their trading ranges, we believe it is unlikely that they will significantly climb above that range any time soon," he said.
Bob Dickey at RBC Dain Rauscher said he thinks the market is slowly but surely moving forward.
"Two steps forward and one step back is the kind of pattern that marks the current rally period," he said.
"While stocks are in a generally good technical condition, this is not a run-away bull that can't be caught. Instead, this rally period is slow and controlled, and more likely to be another move up in the trading range of the past two years, as opposed to the start of a major bull trend. The top of the range is 11,000 on the Dow, which may sound like a good number, but is really only five percent away."
Bonds were sizzling on the tepid economic news and fresh hopes for a Federal Reserve pause.
The yield on the 10-year US Treasury bond fell to 3.979 percent from 4.073 percent a week earlier while that on the 30-year bond fell to 4.281 percent from 4.430 percent. Bond yields and prices move in opposite directions.