Are stocks due for a correction? Friday’s job report may tell

NEW YORK -- Stocks dropped about 1% in trading Wednesday following downbeat labor and service-sector reports. Could this foreshadow a correction?

The Dow Jones industrial average fell 111.66 points, or 0.8%, to 14,550.35. But the blue-chip index is still up 11% this year.

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Some market observers have been expecting perhaps a 5% to 10% drop in stocks in the second quarter, and the spark for such a sell-off could come as soon as Friday when the U.S. Labor Department issues its March unemployment report.

“It could be the trigger, but we’d have to see a pretty negative report,” said Randy Frederick, managing director of active trading and derivatives at Charles Schwab. “The market is due for a pullback, but just being due is not enough. There has to be some sort of catalyst.”

The S&P; 500 dropped 16.56 points, or 1.1%, to 1,553.69. The Nasdaq lost 36.26 points, or 1.1%, to 3,218.60.

The Dow and broader Standard & Poor’s 500 index both reached new all-time highs last month, riding a wave of easy money courtesy of the Federal Reserve. Worries over political gridlock in Washington have waned, as have concerns over the European debt crisis.

But recent economic data has been more mixed, and the federal budget “sequester,” if left unaddressed, threatens to impede U.S. growth in coming months.

The Institute for Supply Management reported Wednesday the service sector’s expansion slowed last month, falling short of expectations. That followed an ISM report this week showing manufacturing growth had also slowed.

Payroll processing firm ADP, meanwhile, reported the economy added 158,000 private-sector jobs in March, far fewer than the 200,000 economists had expected.

So the Labor Department’s March employment report will be a key signal for how well the U.S. economy is recovering.

Marc Doss, regional chief investment officer at Wells Fargo Private Bank in San Diego, doesn’t think a pullback in stocks will be as sharp as in previous years.

He would use a stock-market decline as a buying opportunity. After all, he predicts the S&P; 500 could finish the year at 1,600.

“That’s not a huge move from here, so we’re certainly going to see a slowdown” in the rally, Doss said. “It’s not going to be a straight-up path, for sure.”

Beyond Friday’s jobs report, investors will be looking at first-quarter earnings, which corporations will be reporting in coming weeks.

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