Rally-ho! Or no?
Markets rallied last week, but it may be too soon to call it the year of the bull.
March 3, 2002: 6:00 a.m. ET
By Staff Writer Alexandra Twin
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NEW YORK (CNN/Money) - While the impact of a strengthening economy gave a jolt to weary stock investors last week, the same factors that unnerved markets in the first place -- concerns about accounting and corporate profits -- will still need to be resolved before anyone is ready to call it the year of the bull.
Last Friday, in particular, investors showed great resolve as the Dow industrial average closed at its highest level since August, and some of the most depleted tech stocks of late notched a respectable comeback.
But February was an extremely difficult month for equities, with the Nasdaq composite losing more than 10 percent. The Dow industrials fared better, eking out a 1.9 percent gain, as investors nervous about accounting and corporate profits rotated out of techs and into some defensive plays.
Last week, a key measure of the manufacturing sector broke out of an 18-month slump, while personal income and consumer spending gained strength in February. A revision of fourth-quarter gross domestic product showed the economy grew at a faster rate than initially thought.
Earlier in the week, Federal Reserve Chairman Alan Greenspan was cautiously optimistic as he told Congress that the economy is pulling free from the recession that many economists say began in March of 2001, although challenges remain.
The semiconductor sector erased the 8.4 percent decline it posted in February. Cisco (CSCO: Research, Estimates) snapped back from the pressure of brokerage downgrades earlier in the week, and Novellus Systems (NVLS: Research, Estimates) helped the chip equipment maker sector after it said it is on track to post a narrower-than-expected loss in its first-quarter.
On the downside, shares of business software maker Oracle (ORCL: Research, Estimates) were hit hard on a Merrill Lynch note saying that the company looks to be on track for the current quarter but may have problems with its May quarter.
Nonetheless, averages managed to close up for the week, with the Dow Jones industrial average adding 4 percent and Standard & Poor's adding 3.9 percent. The Nasdaq composite also closed the week up 4.5 percent, its first positive week after four of declines.
"We've seen a clear pickup in consumer spending and housing and now the manufacturing sector," Mickey Levy, chief economist at Bank of America, told CNNfn. "I'd say with a couple more months, businesses will start to gain confidence."
But what's been holding the markets back from jumping in more fully is "the turnaround in corporate profits and cash flows," Levy said. "Secondly, it's just confidence that we're coming out of this recession and that product demand will be increasing."
The economy has been urging stock investors in a direction that has felt too risky to fully commit to. Last week's surprise rally seemed to challenge that. But some analysts cautioned that any rally may have stemmed as much from oversold conditions as from a willingness for stocks to take a cue from the economy. In other words, enjoy the ride, but be cautious.
"Right now the general direction is up and that's because of the economy," said Michael Carty, principal at New Millennium Advisors. "But there is still a tremendous amount of skepticism about analysts' forecasts and the ability for corporations to repair profits that could challenge us next week."
The game of follow-the-leader is being played backwards, Carty said. Economic reports tend to be lagging indicators and "the markets should be leading the economy."
There were no new accounting snafus to add to broader worries stemming from Enron. But the bankrupt energy firm remained an influencing factor, albeit a muted one, as Congressional testimony continued. On Tuesday, former CEO Jeffrey Skilling persisted in proclaiming his innocence and instead cast blame at a variety of different parties, including the Federal Reserve and the company's auditors.
"There are thousands of companies that are honestly run, but ... Enron has spilled over into other companies," Bernadette Murphy, market analyst at Kimelman & Baird, told CNNfn's CNN Money Morning. "I think Enron is unique, but the worry is still there."
Unemployment rate is expected to rise
Looking to the week ahead, business activity in the U.S. service sector is expected to have picked up the pace in February as well when a survey of the nation's purchasing managers is released Tuesday.
The Institute of Supply Management's index of non-manufacturing activity is expected to have risen to 50.8 in February from a reading of 49.6 in January.
The index had fallen in the wake of September 11, recovered in November and December, but then dipped slightly in January. Economists will be looking to see that the February index returns to a reading above 50. As with the ISM's manufacturing survey, a reading above 50 indicates growth; one below 50 means contraction.
On Friday, the Labor Department releases its monthly report on joblessness. The nation's unemployment rate is forecast to have risen to 5.8 percent in February following a decline to 5.6 percent in January. Employers are expected to have cut 50,000 jobs from payrolls in February after cutting 89,000 in January.
However, economists say that the backwards-looking unemployment data should be taken with a grain of salt. Joblessness will often lag a broader recovery with businesses reluctant to expand their workforce until a rebound has picked up steam.
Staples, Kohl's among names reporting
Although the fourth-quarter period of reporting has nearly ended, a few names are due to release results this week. For the third week in a row, retail issues will dominate.
On Tuesday, office supplier Staples (SPLS: Research, Estimates) is expected to announce it has earned 26 cents per share, a 30 percent improvement over the 20 cents a share earned one year earlier.
Discount department store Kohl's (KSS: Research, Estimates) is expected to have earned 66 cents a share, a 26 percent gain on the 52 cents per share earned one year ago when it reports Tuesday.
Wednesday brings results from women's apparel chain AnnTaylor (ANN: Research, Estimates), which is expected to have earned 33 cents a share, 83 percent better than the 18 cents per share earned one year earlier.
On Thursday, upscale department store Saks (SKS: Research, Estimates) is expected to report earnings of 48 cents a share, a 34 percent decline on the 73 cents per share earned one year earlier.
On Friday, doughnut maker Krispy Kreme Doughnuts (KKD: Research, Estimates) is expected to report earnings of 13 cents a share, a 62 percent improvement over the eight cents a share earned one year earlier.
Outside of retail, chip gear maker National Semiconductor (NSM: Research, Estimates) is expected to report a net loss of 27 cents per share on Thursday, a 200 percent decline on the 27 cents per share earned a year earlier. 
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