What a Week: Economic Data Get Market's Blood Pumping

Mounting evidence that the economy is emerging from a steep downturn and a dearth of corporate accounting blowups gave the major averages a much-needed lift this week.

The Dow Jones Industrial Average rose 400 points, or 4% to 10,368 -- its highest level since Aug. 27. The Nasdaq added 78, or 4.5%, to 1802, and the S&P 500 rose 42, or 3.8%, to 1131.

Stocks ended the week much the way they started, with sizzling gains, after a myriad of economic reports bolstered the case for a recovery. The Institute for Supply Management said its purchasing managers' index rose to 54.4 in January, bringing to an end 18 straight months of contraction in the manufacturing sector.

Construction spending and personal income and spending also exceeded expectations and gave investors hope that the recession has run its course.

The reports came on the heels of other encouraging statistics. Earlier in the week, the National Association of Realtors said existing home sales zoomed 16.2% in January to a record 6.04 million annualized rate, well above the 5.27 million that had been expected by economists. Durable goods orders also flew past analysts' estimates and fourth-quarter gross domestic product growth was revised higher to 1.4% from an initial reading of just 0.2%.

Many economists have now started to raise their economic growth projections, with Merrill Lynch estimating that GDP will rise at a 3.5% rate during the first half of the year. The firm also expects S&P 500 earnings to climb 15% to $45 in 2002 and 22% to $55 in 2003, a dollar higher in both years than was previously forecast.

"Demand is coming back far more quickly than anyone had expected," said Merrill economist Bruce Steinberg.

Federal Reserve Chairman Alan Greenspan added to the ebullient tone when he told Congress on Thursday that a "subdued recovery" is likely under way.

"Despite the disruptions engendered by the terrorist attacks of Sept. 11, the typical dynamics of the business cycle have re-emerged and are prompting a firming in economic activity," he said.

Still, he was careful to temper his remarks and subdue fears of rising interest rates. "An array of influences unique to this business cycle seems likely to moderate the speed of the anticipated recovery," he added.

Fed funds futures are indicating that traders expect interest rates to be 125 basis points higher by the end of the year than they are today, according to Tony Crescenzi, chief bond market strategist at Miller Tabak. That would put the federal funds rate at an even 3%.

To be sure, not all the news was positive this week. Two sets of consumer confidence numbers proved weaker than expected as the recent stock market declines and accounting scandals took their toll. Meanwhile, new home sales plunged to their lowest level since June 2000, which some took as a sign that one of the economy's strongest sectors may be starting to crack.

The corporate news concerning profit outlooks was somewhat ambiguous. General Motors , Eastman Kodak and Qualcomm all suggested that business is getting better, but an earnings warning from Riverstone Networks sent that stock plunging almost 50%. A warning from Gateway pushed shares of the PC maker down almost 10%.

"We'll still see some mixed news but generally the trend is positive," said John Waterman, managing director of investments at Rittenhouse Financial. "The economy has clearly turned the corner."

Hugh Johnson, chief investment officer at First Albany, said stocks came into the week undervalued, and that this gave the market a nice base from which to rally. By his calculations, the market was about 4.5% undervalued at the start of the week and is now undervalued by about 1.5%.

"This could be the start of something more sustained," Waterman said. "That is, unless there is some other big event on the political [or] military front or another big accounting surprise."

While the concerns over improper accounting didn't disappear this week, the impact on the market was certainly much less pronounced. On Tuesday, Hanover Compressor said it would restate almost two years worth of financial results and declared that the Securities and Exchange Commission was investigating a partnership. However, the stock rose 13% on the day, and the news had very little impact on the overall market.

"I don't know if investors are tiring of Enron," Johnson said, "but the impact on the stock market is certainly dissipating."