Volatility roared back in a major way during the holiday shortened trading week. After Tuesday’s surge of more than 1% throughout the major indices, stocks plunged more than 2% late in the week after multiple earnings and economic reports missed their mark. Stocks posted their worst 3-day run since February 2009 to close the week.

The Dow dropped 436.67 points, or 4.1%, to close at 10,172.98. The S&P soured 44.28 points, or 3.9%, ending at 1,091.75. The NASDAQ declined by 82.80 points, or 3.6%, to close at 2,205.29.

Unemployment remains a pressing concern as the number of newly unemployed workers increased unexpectedly last week. Initial claims came in at 36K to a seasonally adjusted rate of 482K. The increase surprised economists, who were looking for a marginal drop in claims.

Sentiment had previously been buoyed by the fact that since late October, companies have been cutting fewer jobs. Claims have decreased by 50K filings and the number of people continuing to draw benefits dropped marginally to just under 4.6M. But more than 5.9M are still receiving extended benefits, an increase of more than 600K from the previous reading.

Sentiment turned decidedly bearish after manufacturing in the Philadelphia region, despite expanding in January for the fifth consecutive month of gains, showed a sequential decrease. The Philly Fed’s economic index for manufacturing revealed a reading of 15.2, a much lower reading than the 22.5 recorded in December. Even though the numbers are below the previous month’s reading, any number over zero signifies growth.

The index disclosed that new orders fell to 3.2 from 8.3, while shipments declined from 14.9, the highest since December 2007, to 11. The employment index advanced to 6.1 from 4.5 in December. The 6.1 reading was the highest level in almost two years. The index of prices paid slipped to 33.2 from 36.6 in December, while prices received climbed to 2.7 from 1.4.

On the housing front, the Commerce Department announced that construction of new homes and apartments plunged 4% in December to a seasonally adjusted annual rate of 557K, well below the 580K in November. Economists had anticipated a reading of 580K. The Midwest and Northeast led the way in declines, falling 19% each. The South was the only bright spot, showing an increase in construction of 3%.

For the year, more than 550K new homes began construction, down almost 40% from the previous year and the lowest reading dating back to 1959. Meanwhile, applications for building permits (a gauge of future activity) surged 11% in December to an annual rate of 653K, the highest level since October 2008.

On a positive note, a reading from the Conference Board’s index of leading economic indicators showed that predictions for future economic activity increased by 1.1% in December, a sign that things could begin to pick up by spring. Economists were looking for the index to show a smaller increase of 0.7% for the month.

The reading follows November’s revised gain of 1%, which had been first reported to show an increase of only 0.7%. Eight of the 10 components demonstrated improvements for December. The interest rate spread and building permits both showed solid gains throughout the month.

Prices at the wholesale level inched higher in December, advancing by 0.2%, as a big drop in the cost of energy offset a surge in food prices. For the month, the PPI followed November’s surge of 1.8%, while economists had anticipated a flat reading for December.

The marginal increase in prices resulted from a 0.4% decline in energy costs. However, the overall reading was greatly affected by a 1.4% jump in food prices. The jump in food costs accounted for one-fifth of December’s overall increase in wholesale inflation. Core inflation, which excludes food and energy costs, came in flat.

For the year, wholesale prices increased by 4.4%, versus a 0.9% decline in prices throughout 2008. For 2009, core inflation advanced by 0.9%, much better than the 4.5% surge in 2008.

Economic data picks up in velocity this week with the FHFA Home Price Index report for November, Existing Home Sales, New Home Sales and Durable Orders reports for December, Consumer Confidence, Chicago PMI and University of Michigan Sentiment readings for January, the Employment Cost Index and the advanced readings for GDP for the 4Q, as well as weekly results for Initial Claims and Crude Inventories