Credibility concerns dominated the headlines this week, resurfacing again on Friday with revelations of a Securities and Exchange Commission inquiry into accounting practices at Nvidia ( NVDA) and questions about the quality of IBM's ( IBM) earnings. Despite those developments, and a weaker-than-expected consumer confidence report, Friday's losses weren't horrific by recent standards. The session befitted a week that was actually pretty decent for major averages despite all the hand-wringing over individual names. For the week, the Dow Jones Industrial Average rose 1.6%, and the S&P 500 gained 0.7%, while the Nasdaq Composite shed 0.75%. Those weekly performances are more impressive when you consider Friday's developments with Nvidia and IBM, as well as concerns at various points in the week about Tyco ( TYC), Qwest Communication ( Q), Calpine ( CPN) and Polycom ( PLCM) (among many others). "Sounds like a recipe for investor angst on steroids," quipped one emailer. "We're talking months at the very least for these cumulative psychological hits to blow over -- that is, if there aren't any more cockroaches that come scurrying into the light." The reader's comments eloquently expressed what many market watchers are thinking, and I haven't yet mentioned the ongoing concerns about J.P. Morgan ( JPM), which fell 3.4% this week because of concerns about its internal controls and expectations that its debt rating will be downgraded. What helped were some better-than-expected earnings from companies such as Applied Materials ( AMAT), Office Depot ( ODP)and Hewlett-Packard ( HWP), as well as mainly positive economic news. The economic data included better-than-expected retail sales (excluding autos) and further drops in initial jobless claims and business inventories. Friday's data were less uniformly positive, most notably an unexpectedly large drop in the University of Michigan's consumer confidence survey to 90.9 in February vs. 93 in January. Separately, the government reported capacity utilization fell to 74.2% in January, its lowest level since April 1983, from 74.4% in December. On a more positive note, industrial production fell by just 0.1% in January, its smallest decline since July. The producer price index rose by 0.1% in January, its first increase since September. But the core rate fell by 0.1%, and this helped mollify concerns that were evident at midweek that the Federal Reserve may tighten monetary policy as early as its May meeting. The price of the benchmark 10-year Treasury note rallied 20/32, to 100 3/32 Friday, leaving its yield at 4.86%. The 10-year's yield, which moves inversely to its price, rose 2 basis points this week, although it is down 18 basis points since Jan. 31.
Groping for Meaning
The week's action in equities gave credence to the idea being that accounting and related concerns may continue to roil individual issues but may be losing the ability to extract big losses on the major averages (a.k.a. the denouement theory ). One caveat to the theory was that concerns about a bellwether company could certainly impact the averages, as IBM proved. IBM's $5 loss accounted for 36.3% of the Dow's 95.35-point decline on Friday. That said, the question going into the long weekend (U.S. financial markets are closed Monday in observance of President's Day) is whether investors will take heart in the market's relative resilience to the news this week. Or will they recoil in horror at the seemingly never-ending parade of companies with various problems, accounting and otherwise? Judging by the anecdotal evidence, the majority of participants on Wall Street fear the latter scenario. "We prefer to think that this is a 'relief' week that will be followed by a resumption of the downward trend next week," commented Woody Dorsey, president of Market Semiotics. "The majority may still assume we are in a 'new bull market' but the divergence between price-to-earnings ratios and profit reality is being recognized as unsustainable." Further supporting the bearish scenario is that for all the presumptive fear in the marketplace over accounting issues, the CBOE's Volatility Index ( VIX ) fell 11% this week. On the other hand, the percentage of bears in the Investors Intelligence survey rose to 29.5% this week, from 28.9%, while bulls fell to 47.4% from 48.5%. Those expecting a correction rose to 23.1% from 22.6%. Additionally, the equity put/call ratio rose as high as 1.49 on Friday before settling at 1.01, indicating an unusually high level of put buying, or bearish bets, by investors. Given all the cross-currents, perhaps the market will continue to confound those looking for big up or down moves by maintaining this frustrating, sideways-type action. Speaking of which, a growing number of market watchers believe Dow 10,000 -- which the index revisited this week -- is shaping up to be like Dow 1,000. The Dow first flirted with 1,000 in 1966 but didn't close above that mark until November 1972. Thereafter, it took until Dec. 1982 -- more than 10 years -- for the index to finally put 1,000 in its rearview mirror. There were plenty of issues weighing on stocks from 1972 to 1982 -- notably runaway inflation -- but "stocks did not climb a 'wall of worry,' they just staggered," Donald H. Straszheim, president of Straszheim Global Advisors in Westwood, Calif., recently commented. With the Dow now approaching three years since its first close above 10,000 on March 29, 1999, "the period from 2000 to 2010 may look a lot like 1966 to 1982," he surmised. Should that come to fruition, look for a similar effect on investor confidence and attitudes as occurred in the prior era.