NEW YORK (CNNMoney.com) -- Stocks rallied Friday in a thinly traded session ahead of the Labor Day weekend, as investors focused on the positives in a mixed report on the labor market.
However, all three indexes ended the week lower.
Employers cut less jobs in August than they have in months, but the unemployment rate still rose to a fresh 26-year high.
"It's a good report that generally suggests more healing in the economy," said Jeff Kleintop, chief market strategist, LPL Financial. "But the market has been saturated with good news and is starting to show fatigue after the S&P 500 rallied 50%."
A roughly six-month rally propelled the S&P 500 more than 50% through last week, leaving the broad index at its highest point since just after the collapse of Lehman Brothers last September.
But stocks tumbled in the first three sessions of this week as investors worried about the health of the economy. There was a late-session advance Thursday as some of the bank and tech shares that slumped earlier in the week bounced back.
That carried over to Friday's session.
Trading volume was light ahead of the three-day Labor Day weekend. On the New York Stock Exchange, advancers beat decliners four to one on volume of 1.02 billion shares. On the Nasdaq, winners topped losers almost three to one on volume of 1.74 billion shares.
Economy: Employers cut 216,000 jobs from their payrolls in August, the Labor Department reported, after paring a revised 276,000 jobs in July. The month brought the smallest number of job cuts since August 2008. Economists surveyed by Briefing.com expected 230,000 job cuts
The unemployment rate, generated by a separate survey, rose to 9.7% from 9.4%, a 26-year high. Economists expected unemployment to rise to 9.5%.
Unemployment is expected to hit 10% by the end of the year or early 2010, even as the economy is starting to recover. Although a jobs recovery typically lags a broader recovery, the rise in unemployment remains the market's biggest economic worry right now.
Without a healthier labor market and a burst in consumer spending, inventory rebuilding and fiscal and monetary stimulus are the main factors fueling a recovery.
"In the last few weeks, we've gone from pricing in a recovery to worrying about a double-dip recession in 2010 when all the stimulus money gives out," said Kleintop.
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