Signals indicate recession may be nearly over

NEW YORK -- Wall Street plunged into despair this past week, agonizing over economic uncertainty and a seeming lack of honesty in corporate accounting. Then, like magic, the Federal Reserve's positive economic outlook gave the market reason to believe in a better future.

Investors might have their first really concrete signals that the recession is ending, but they still have as many questions about the strength of a recovery, and about the truthfulness of the people who run U.S. companies.

"This week has been very positive economically," said Brian Belski, fundamental market strategist for US Bancorp Piper Jaffray. "So why is the market acting so weird?"

By "weird" Belski was referring to the tug of war as investors dealt with conflicting emotions -- fear and optimism. They are worried about questionable accounting procedures following the collapse of Enron Corp. in December, and at the same time are filled with hopes that the recession is ending, as the Fed indicated.

Meanwhile, companies have yet to produce the earnings growth the market needs as confirmation of a business turnaround.

"The market has so many variables right now," Belski explained.

The uncertainty about corporate honesty prompted investors to dump shares Tuesday, when the Dow Jones industrials fell 247.51, their worst one-day point drop in three months.

"The average investor can understand a weak economy or a market downturn because of a troubled economy. But when they start losing faith in the numbers companies are giving them, now we are reaching another area," said Thomas F. Lydon, Jr., president of Global Trends Investments in Newport Beach, Calif.

But the Fed worked its magic, at least temporarily assuaging investors' qualms and leading them to buy again and send the Dow up more than 300 points over Wednesday and Thursday. There were other positive factors at work, including reports that the economy grew very modestly in the fourth quarter and that Americans' incomes rose in December.

Bargain hunting after Tuesday's vigorous selling contributed to the snapback.

The question that investors now face is which sentiment will serve them best in the coming weeks: fear or hope?

Market analysts and economists say a little bit of both, with a bias toward optimism.

"I think people should feel a little bit better that we are going to see a bottoming out in the economy and a turnaround forthcoming," Belski said.

Time is on the side of Wall Street, as well, noted Bob Armknecht, manager of the Galaxy Equity Growth Fund. Companies have been working off excess inventories for about a year. And profits have sunk so low that pretty soon companies will have no trouble posting quarterly results that exceed those of the previous year.

"If we are not turning the corner, we are right at the corner," Armknecht said.

And, if investors despair sometimes, some say that's not terrible. In fact, if the market can advance even when investors are fearful, Wall Street believes that's often the most encouraging sign of all.

"The best moves come when people are not optimistic," said A.C. Moore, chief investment strategist for Dunvegan Associates in Santa Barbara, Calif.

Wall Street's major indexes ended the week mixed. The Dow rose 67.18, or 0.7 percent, to 9,907.26, after slipping 12.74 Friday.

The Nasdaq composite index fell 26.45, or 1.4 percent, to 1,911.25, after a loss Friday of 22.78.

For the week, the Standard & Poor's 500 index declined 11.08, or nearly 1 percent, to 1,122.20, after losing 8.00 Friday.

The Russell 2000 index, which tracks the performance of smaller company stocks, barely managed to end the week positive, rising 0.69, or 0.1 percent, after falling 3.06 Friday. It closed the week at 480.04.

The Wilshire Associates Equity Index, which represents the combined market value of all New York Stock Exchange, American Stock Exchange and Nasdaq issues, ended the week at $10.490 trillion, down $91.850 billion from the previous week. A year ago the index was $12.435 trillion.

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