Stocks: New month, same worries

NEW YORK (CNNMoney.com) -- The worst month on Wall Street in nearly a year has left market pros and retail investors wondering if the long-in-the-works correction is finally here.

"It remains to be seen, but it feels like this could be the correction that people have been talking about forever," said Hank Smith, chief investment officer at Haverford Investments. "You just can't run as long as much as we have off the bottom without seeing a pullback of maybe 10% on the S&P 500."

Better-than-expected quarterly results from marquee names such as Intel, Apple and Ford Motor had little impact on the individual stocks or the broad market last week. Friday's fourth-quarter GDP report -- showing the fastest economic growth in six years -- coincided with a stock selloff.

That weakness looks to remain in place this week, the first week of February, as investors sort through more corporate profit reports and readings on the consumer, housing and the labor market.

"The market has had an opportunity to rally on some good earnings and economic news, and it hasn't grasped that opportunity," said John Wilson, chief technical strategist at Morgan Keegan. "It's starting to look like we could be in need of a correction, or at least some more sideways action."

Rally hits reverse. January started off well, with the Dow and S&P 500 hitting 15-month highs and the Nasdaq rising to levels not seen since before the collapse of Lehman Bros. in September of 2008.

But the last two weeks of the month were a bust, with the major gauges stumbling on bets that the stock market rally has run way ahead of the still slowly developing economic recovery.

The selling was driven by bank lending curbs in China, the White House's plan to restrict trading by big banks, ratings agency warnings about Japanese and British debt, and questions about whether Fed Chairman Ben Bernanke's term would be renewed. Bernanke was ultimately confirmed for a second term, but the other issues remain in play.

For the month, the Dow tumbled 3.5%, the S&P 500 lost 3.7% and the Nasdaq composite lost 5.4%. It was the worst month on Wall Street since February 2009. (For more on why some investor worry that a down January is a bad omen for the year, click here.)

And February 2010 is shaping up to be pretty tumultuous as well.

"We've had a number of mini-corrections since the market bottom in March, and each time the market comes back like gangbusters," said Paul Mendelsohn, president and CIS at Windham Financial Services. "This time it feels different."

He said that good news is being ignored because the market is looking past the first quarter to the second quarter and second half of the year, when economic conditions get tougher.

Earnings growth is expected to slow as the year wears on, and some of the recent housing market data have shown that the slight improvement seen late last year could be temporary. The White House's proposal to restrict trading by big banks, the ballooning deficit and China's plan to limit bank lending have all raised worries.

However, the analysts said that a pullback of 10% or even 15% would likely draw in new buyers. Between the 15-month highs made on of Jan. 19 and Friday's close, the S&P 500 lost 6.6%.

Earnings: The week brings quarterly results from 95 companies, or 19% of the S&P 500. Standouts include Exxon Mobil on Monday; CNNMoney.com parent Time Warner, Pfizer and Cisco Systems on Wednesday; and Toyota on Thursday.

With 220 companies, or 44% of the S&P 500, having already reported results, earnings are currently set to have grown 206% from a year earlier, according to the latest estimates from earnings tracker Thomson Reuters. Revenue is set to rise about 7% year over year.

Cost-cutting continues to fuel earnings, while companies are also benefiting from easy comparisons to a wretched fourth quarter of 2008 -- the worst in Thomson's 15-year history.

Much of the growth is concentrated in the financial sector, which reported a loss in 2008 and is on track to report big profits for 2009. Strip out financials and S&P 500 earnings are just 15%, while revenue growth is just 2%.

Monday: Government reports on personal income and spending and the manufacturing sector are the highlights of a busy day for economic news.

Personal income is expected to have risen 0.3% in December, according to a consensus of economists surveyed by Briefing.com. Income rose 0.4% in the previous month. Spending is expected to have risen 0.2% after rising 0.5% in November. The Commerce Department report is due before the start of trading.

Construction spending is expected to have fallen 0.5% in December after falling 0.6% in the previous month.

The Institute for Supply Manufacturing's manufacturing index for January is expected to have risen to 56.1 from 55.9 in the previous month. Any reading above 50 indicates growth.

Tuesday: The National Association of Realtors' pending home sales index is due in the morning, while the nation's automakers will be releasing their January sales figures through the day.

In Washington, the Senate Budget Committee holds a hearing on the new budget in the morning. Former Federal Reserve Chairman and current economic advisor Paul Volcker testifies on financial reform before the Senate Banking Committee later in the day.

Wednesday: A heavy week for labor market news kicks off Wednesday. A report from payrolls-services firm ADP is expected to show that private-sector employment fell 40,000 in January after falling 84,000 in December. Outplacement firm Challenger Gray & Christmas reports on announced job cuts in January.

The Institute for Supply Management's January reading on the services sector of the economy is due in the morning, as is the government's latest report on crude inventories.

Thursday: January sales from the nation's retailers will be released through the morning.

The weekly jobless claims from the Labor Department and the Commerce Department reading on factory orders are also due.

Friday: The big report of the day is the January jobs report from the Labor Department. Employers are expected to have added 13,000 jobs to their payrolls in the month after cutting 85,000 in the previous month.

The unemployment rate, generated by a separate survey, is expected to hold steady at 10%.