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After ditching its lofty expectations, most notably last Friday, Wall Street was braced for more negativity heading into this week. But as is often the case, the market zigged when everyone was looking for it to zag.

To the surprise of most observers, early week "resilience" morphed into a late-week celebration amid a fresh batch of positive earnings from the likes of


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Procter & Gamble

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Those results proved to be the perfect antidote to the blues felt in the previous week amid high-profile disappointments from the likes of


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The discernible mood shift was noticeable in the

Dow Jones Industrial Average

, which rose 2.3% for the week and returned into positive territory for the year. For the week, the

S&P 500

rose 1.7% and the

Nasdaq Composite

gained 2.5%.

On Friday, Microsoft and Procter & Gamble helped the Dow advance 97.74 points, or 0.9%, to 10,907.21, the Nasdaq rise 21.23 points, or 0.93%, to 2304.23, and the S&P 9.89 points, or 0.78%, to 1283.72.

Renewed exuberance helped investors digest another spike in crude oil prices Friday as well as much worse-than-expected fourth-quarter GDP growth. The GDP grew only 1.1% for the last three months of 2005, compared with already low forecasts of 2.8% growth. Crude closed up $1.50 to $67.76 a barrel Friday after U.S. Secretary of State Condoleeza Rice demanded U.N. action on Iran Thursday night.

When the GDP report came in, investors might have begun to fear that gloomy forecasts of a serious economic slowdown were already turning into a reality. Instead, a report showing an unexpected rise in new-home sales in December had them believe that housing -- which is at the heart of

concerns about a consumer meltdown -- might be on track for a soft landing.

Economists, however, were quick to point out that both the GDP and the new-home-sales reports were likely one-time blips. A huge drop in auto sales and an unexplained drop in federal defense spending led growth lower in the last three months of 2005.

As for December's increase in new-home sales, it followed a 9% drop the prior month, and not the beginning of a countertrend in what remains a cooling housing market, according to Joel Naroff, president of Naroff Economic Advisors.

The housing data still showed rising inventories of unsold homes, and prices that continued to ease, Naroff notes. As for the GDP report, it also showed that business investment rose at the slowest pace in almost three years last quarter. According to Thursday's December durable goods orders report, however, business spending was at least picking up last month, perhaps setting the stage for a first-quarter rebound -- even if

widespread forecasts of a longer-term rebound sound shakier.

The likes of Intel, which disappointed last week, have shown that increasing capacity sounds like a bad idea in a competitive environment. Meanwhile, the likes of Broadcom have shown that growing through acquisitions makes more sense (Broadcom announced a deal to buy Sandburst for $80 million Monday). Acquiring others does seem a more likely strategy than increasing capacity for firms seeking to grow in a slowing sales environment, as

discussed here.

But Wall Street was not really going to bother with the details on Friday. More so especially after the strong earnings and guidance from Microsoft and P&G helped investors forget that cyclical companies such as Alcoa,


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General Motors

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were feeling the pinch of rising energy prices and, at least in GM's case, of interest rates.

"The market is again anticipating a soft-landing scenario, with an overall slowing in the economy and lower rates with earnings growth continuing even in the face of a weaker consumer," says Jack Ablin, chief investment officer at Harris Trust.

The stock market comeback this week was again likely driven by the same professional investing crowd that had propelled stock proxies to new highs in the first two weeks of January.

According to research firm TrimTabs, equity funds that invest primarily in the U.S. stocks received nothing from mutual fund (i.e. retail) investors in the week ended Wednesday, compared with inflows of $1.1 billion the prior week. "The U.S. market has gone nowhere since late November and flat markets do not attract inflows," says Carl Wittnebert, TrimTabs' director of fund flow research.

At the same time, international equity funds had inflows of $2.4 billion, roughly in line with $2.7 billion the prior week. Signs of economic life coming both from Japan and Europe have led to big rallies their stock markets.

Meanwhile, expectations that a slowing economy will soon have the

Federal Reserve

end its 19-month long monetary tightening campaign have pressured the dollar since late last year, which is not encouraging for international investors.

But there was a shift in expectations about interest rates this week, which helped support the dollar while it pressured bonds. The Treasury market had long ago fully priced in a quarter-point rate hike by the Fed next Tuesday, taking the fed funds rate to 4.50%. But odds that this will be followed by another hike in late March had risen to 78% by Friday, compared with roughly 50% last week, according to Miller Tabak.

The key reasons: The new-home sales data and the GDP price deflator, which rose 2.2% in the fourth quarter, from 1.4% in the third quarter.

Ben Bernanke, who will be taking over as Fed chairman after Alan Greenspan's last Fed meeting on Tuesday, is going to be "tested right off the bat," says Naroff. "This

GDP report is the worst-case scenario for the Fed."

However, Wall Street is unlikely to hear much from the Fed in its statement Tuesday, according to David Powell, currency strategist at IDEAGlobal. "After raising another 25 basis points, Greenspan is going to want to leave some flexibility for Bernanke."

No news might be good news if the market keeps the same rosy glasses it used all week. Then again, it's still earnings season. How investors respond to the next batch of reports will depend largely on just how high expectations have been reinflated after this week.

In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;

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