Weekly Recap

Briefing:
"Weekly Wrap

The stock market rebounded 1.1% and stabilized this week. The presumed catalyst for much of the gains was an improvement in Asian stock markets. To a large extent, however, the market was buffeted by rapidly shifting sentiment that settled down over time.

The S&P is down a net 3.3% over the past two weeks. That represents a reasonable consolidation from the point where many analysts have said the market had gotten ahead of itself. The S&P is down 1.1% for the year to date.

The week opened poorly. On Monday, the S&P lost 13 points. Strangely, it was widely attributed to a decline in Asian markets. In fact, those markets were simply catching up to the losses on Friday in US markets. Regardless, sentiment was poor and the Asian weakness was for many a good excuse to sell.

The markets rocketed higher on Tuesday. The S&P gained 21 points. Again, the presumed catalyst was the Asian financial markets. It is hard to rationalize such a huge swing in the market value of US corporations based on a move in Asian stock prices, particularly Shaghai stocks, but the market was running on emotion more than reason.

The S&P eased back 3 points on Wednesday. That was not surprising given the huge gain the day before. On Thursday, however, the S&P gained a surprising 10 points even though February same store sales were fairly weak. The gain that day seemed to provide underlying support to the market and to stabilize sentiment.

Friday brought some truly relevant news. February nonfarm payrolls were reported up 97,000. This was close to an expected 100,000 increase. More importantly, it was not below 50,000, as many had feared. A weak number on that magnitude could have rekindled recession fears.

The good news was bolstered by the fact that the January and December payroll gains were revised a net 55,000 higher. Furthermore, construction employment fell a sharp 71,000 in February due in part to cold weather. It may bounce back next month. Finally, hourly earnings were up a stronger than expected 0.4%, leaving the year-over-year gain at 4.1%. With CPI up just 2.1% the past year, real wage gains are picking up.

The data were solid overall and very much consistent with expectations of real GDP growth at 2% to 2.5% for the first half of this year. There was nothing to suggest even a hint of recession. The S&P held its gains for the week and was up 1 point on Friday.

There was very little news of significance this past week other than the employment release. The February ISM services index was a bit weaker than expected at 54.3, but that still reflects growth. Factory orders for January were weaker than expected as well. Neither release had a large impact. The February same store sales noted above were weaker than expected overall but cold weather was undoubtedly a factor.

The earnings calendar was very light. Costco reported profits in line with expectations, and there were a handful of other retailers that reported, but all were quickly dismissed.

Instead, it was all about sorting through sentiment this week. Factors such as the recently noted increase in delinquencies on sub-prime mortgages continued to provide fodder for recession talk even though there is no evidence that overall mortgage demand is weak.

Also persisting as a bearish talk point through the week (on days when stocks were down) was the perceived threat of further unwinding of hedge fund positions as the yen strengthened against the dollar. And the swings in the Asian stock markets were closely followed.

Yet, none of these presumably bearish factors have altered economic or earnings projects. The interest rate outlook still calls for little, if any, change in rates. The bearish issues reflected the prevailing sentiment swings and provided a rationale for selling.

Now, with the market up 1.1% this week, there is a good argument that sentiment is settling down. The S&P is down a net 5.0% from its highs. The excessive optimism from a month ago is gone.

The recent pessimism about a possible recession has now also faded. Perhaps the recent volatility will ease.

If so, investors may look at the market with some optimism, but plenty of caution as well. Earnings growth is slowing. Economic growth is sluggish. There are plenty or risks. Valuation provides some support, however, as the S&P is trading at just 17.1 times trailing earnings.

There certainly will be more volatility ahead, and there remain risks on the downside; but the market may soon return to normalcy with a reasonably priced market and only a moderately favorable outlook.

Index	Started Week	Ended Week	Change	% Change	YTD
DJIA	12114.10	12276.32	162.22	1.3 %	-1.5 %
Nasdaq	2368.00	2387.55	19.55	0.8 %	-1.1 %
S&P 500	1387.17	1402.85	15.68	1.1 %	-1.1 %
Russell 2000	775.44	785.12	9.68	1.2 %	-0.3 %

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Looks like the Friday's employment report helps to keep the market gain through the week. We will see if the market continues to stabilize here. Coming up...Barron's bullish picks.