Evidence is mounting that the long-awaited economic recovery is at hand, as discussed in today's

Midday Musings. But while the economy's pending recovery brought hope to investors in the fourth quarter, its presumptive arrival has them heading for the exits.

In a nutshell, market sentiment has transitioned from "the economy is going to recover, hooray!" to "the recovery is here, uh-oh."

The large-scale example of "buy the rumor, sell the news" continued today as a stronger-than-expected report on the Conference Board's index of leading economic indicators failed to inspire much buying. Even attempts to put a positive spin on

Fed

Chairman

Greenspan's

recent

speech proved insufficient to stop the market's recent downturn.

Instead, investors fretted that equity valuations are overly extended for a recovery that seems likely to be modest, helping send the

Dow Jones Industrial Average

down 0.6%, the

S&P 500

down 0.7%, and the

Nasdaq Composite

lower by 2.5% to its lowest close since Nov. 21.

Now that the recovery is apparently at hand, rather than some mythical future occurrence, investors are being forced to ponder whether it will be strong enough to justify the relatively high price-to-earnings ratios of many stocks. A growing consensus is that it will fail to be.

Some believe that low interest rates and prospects for improved corporate profits justify higher-than-average P/Es. To these investors, a muted economic recovery means 2002 will be only a modestly positive year for stocks -- say, with major averages rising 5% to 10%.

But to others, the combination of a muted recovery and higher-than-average P/Es augurs danger for those long stocks.

"Except for some restocking of inventory, we think there is a profound lack of visible revenue growth engines for the U.S. economy," commented Douglas Cliggott, J.P. Morgan's market strategist.

As have many others, Cliggott argued that it is unlikely consumer spending will accelerate this year after remaining remarkably strong throughout the recession. Simultaneously, he noted business spending on software and computer equipment remains moribund while markets for exporters remain weak. Given that backdrop -- and the fact consensus expectations are for year-over-year S&P 500 earnings growth of 8% in the second quarter and 24% in the third quarter -- "we see a high probability of very large negative

earnings per share revisions" this year, the strategist wrote.

Cliggott, who admitted being overly skeptical about prospects for fourth-quarter earnings, is one of the few mainstream market-watchers forecasting 2002 will be another down year for major averages.

"Given the current mix of historically high P/E multiples on very ambitious EPS estimates, we think the S&P 500 will decline again this year," he wrote.

Few on Wall Street agree with him, but many are now beginning to question the rosy 2002 forecasts offered by other strategists.

Stranded at the Drive-In

Remember that scene in

Grease

TheStreet Recommends

when Sandy slams the car door on Danny's ... err, umm ... on Danny?

Substitute

Willamette's

(WLL) - Get Report

board for Olivia Newton-John's character and you get an idea of how things went today for

Georgia-Pacific

(GP)

shareholders (a.k.a. John Travolta's character).

In the wake of Willamette's decision to agree to

Weyerhaeuser's

(WY) - Get Report

$55.50 per share takeover bid, shares of G-P fell 15.5% to $19.75 after trading at a multiyear low of $18.60 intraday.

Today's merger announcement between Willamette and Weyerhaeuser officially ended Willamette's discussions to buy G-P's building products group. G-P is now likely to pursue a spinoff of the division, although it's unlikely the announcement of such a plan will be greeted with as much optimism as

Tyco's

(TYC)

breakup announcement today.

Late today, I spoke with the short-seller who flagged G-P

here in mid-December. He again requested anonymity, but said he'd covered most of the short prior to today because of a belief that the low $20s represents "fair value" for G-P's stock, even including the asbestos risk. "Now that

the potential for a Willamette deal is out of the way, G-P is worth a small short, but nothing I would hinge a portfolio on," he said.

Covering most of the short stake prior to today was "obviously a mistake," the fund manager said. For some time, others short or merely wary of G-P's shares have warned that a deal with Willamette was unlikely to come to fruition. Nevertheless, some observers -- and shareholders -- were apparently caught off guard by the Willamette-Weyerhaeuser news.

"We had held out hope that a combination of a sale of its building products unit to

Willamette for $3 billion-plus would have prevented a debt downgrade," J.P. Morgan equity analysts Lise Shonfield and Claudia Shank wrote today. "We also felt that such a sale may have assuaged concerns on asbestos somewhat."

But in lowering G-P to market perform from buy and lowering their target to $23 from $35, Shonfield and Shank conceded the Willamette-Weyerhaeuser deal has increased the possibility G-P's debt will be downgraded to junk status. Moody's Investors placed G-P's debt under review for possible downgrade on Jan. 7.

"More importantly,

the Willamette-Weyerhaeuser wedding is also likely to throw the spotlight back on G-P's asbestos issue," the analysts wrote.

J.P. Morgan has done underwriting for all three firms.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.