SAN FRANCISCO -- Much better than expected. No, not Friday's

employment report

, which was far

weaker than expected. Rather, it was the market's performance that outshone the forecasts, for both today's session and the entire week.

Friday's action was a microcosm for the entire week, during which equities fared well despite a slate of downbeat economic reports and persistent fears a retrenchment was coming. For the week, the

Dow Jones Industrial Average

rose 1.3%, the

S&P 500

lifted 1.1% and the

Nasdaq Composite

was up 5.6%.

At week's end, market players again were putting their faith in the

Federal Reserve

. In the wake of the April jobs report -- the unemployment rate rose to 4.5% and nonfarm payrolls shrunk by 223,000 -- the fed funds futures market priced in a greater-than-80% chance for a 50-basis-point rate cut at the Fed's May 15 meeting. Odds for a 50-basis-point ease climbed throughout the week, as reports such as Tuesday's

National Association of Purchasing Management's

index and Thursday's jobless-claims data cast doubt on the recovery scenario.

Friday's rally -- which saw the Dow and S&P each rise 1.4%, and the Comp climb 2.1% -- was rationalized by the aforementioned faith in the Fed, as well as a belief that employment is a lagging indicator. The fact traders accepted the

"glass is half full" case demonstrates how dramatically psychology has shifted in recent weeks. In just the past few days, the psychology changed abruptly from one in which recession fears outweighed everything else, back toward the old adage that "what's bad for Main Street is good for Wall Street."

In fact, the psychology shifted three or four times just Friday morning, according to Jim Volk, co-director of institutional trading at

D.A. Davidson


"They keep flip-flopping,

which proves how sensitive the money flows are," Volk said.

Evidence of the waffling came from

Merrill Lynch

chief economist Bruce Steinberg, who -- in the immediate wake of the employment report -- commented "we are now reviewing our forecast and think the economy could be beginning to look recessionary."

But less than 30 minutes later, Steinberg issued a follow-up report, declaring: "After further consideration, we are not, at this point, moving to a recession forecast." Steinberg added that he maintains an outlook that growth will pick up in the fourth quarter.

There's nothing wrong, per se, with Steinberg airing his thought process. In fact, some would say it's preferable. But the back-and-forth does suggest how unsettled many market players are because of the powerful, yet conflicting, forces at work.

Steinberg, who did not return phone calls seeking additional comment, conceded that two consecutive months of declining payrolls -- as April confirmed -- is almost always associated with a recession. But the economist also noted "the Fed has never eased as rapidly as it has this year" and argued the inventory correction "has proceeded so rapidly that most of the correction is finished."

Obviously, many market participants shared Steinberg's decision to give a slight edge to the positive side of the equation. As Volk noted, the action Friday and throughout the week indicate "the bias is to the long side and you've got to buy the dips," unless the recovery scenario gets pushed into 2002.

Can't You Hear Me Knocking?

The bears, of course, argue all this is nonsense and believe the market has gotten far ahead of the fundamentals. The jobs report and other data belie the recovery scenario and suggest today's optimism soon will be replaced by buyer's remorse, they claim.

But tellingly, at least one market player who's previously taken a very pessimistic view is conceding the tides are moving against the skeptics. Odds are he is not alone.

"Our long-term view stays cautious, but it's tough to want to be aggressively bearish right now," said Brett Gallagher, head of U.S equities and deputy chief investment officer at

Julius Baer Investment Management

, which manages about $5 billion.

With money supply soaring, the yield curve steepening, and psychology improving, "it's risky to be running a large bet against" equities, Gallagher said.

In the past six weeks, Julius Baer has roughly halved its cash position from a high of 12% in

late March. Even 6% cash is "higher than we're comfortable with given what's likely to occur in the next month or so," Gallagher said.

The catalyst for this change in outlook was the

bankruptcy rumors about

Lucent Technologies


in early April, which he saw as a sign of panic and that "we were starting to get the capitulation we were hoping for."

Julius Baer bought shares of Lucent at that time and began increasing its overall tech exposure to a market weight today vs. a 19% underweight back in September. Other recent purchases include


(TER) - Get Report




, and

Parametric Technology



"We're not going overboard -- not jumping into second-tier tech and not loading up" on equities, he said. "But you don't want to fight with this market

because the worst thing is if you get so far behind the

benchmark index and get handcuffed because if you're wrong, you're going to lose your job."

With refreshing candor, Gallagher just described the so-called performance anxiety that dictates how many professional money managers act. For the record, Julius Baer's roughly $500 million U.S. equity portfolios were up 4.3% in 2000 vs. a 10.1% decline for the S&P 500. In the first quarter, Julius Baer was down 9.43% vs. a 12.1% decline for the S&P.

But it should be stressed (again) that Gallagher is making a trading call now to avoid giving up his "lead" vs. the S&P, rather than reversing his fundamental stance. The money manager believes earnings estimates remain overly optimistic, and expects the market will start stalling when earnings warnings start rolling in again at quarter's end.

"We're fairly comfortable saying the market outlook is not going to be very strong, and we'll likely end the year lower than today by a noticeable amount," he said, without specifying a level. But, for now, Gallagher has "rejoined the party," even if he's "standing close to the door."

After the action Friday, and throughout this week, you have to wonder if and when those still on the outside of the door will feel compelled to start knocking.

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

Aaron L. Task.