U.S. stock market caught by discord about recovery

By Laura Mandaro, MarketWatch

Last Update: 12:30 AM ET Nov 7, 2009

SAN FRANCISCO (MarketWatch) -- U.S. stocks in the week ahead face more discord between investors confident a solid economic rebound will power shares even higher and those expecting a bumpy recovery that will stall stocks' rise.

This divergence in outlook has produced some big day-to-day swings for the major indexes, which still managed to close the week with healthy gains of more than 3%. And it's created choppy trading on days when investors showed themselves at odds over a major report, such as Friday's survey on October job losses.

"There's a tension in the market," said John Osterweis, president of Osterweis Capital Management in San Francisco.

In one camp, he notes, are investors who believe the economy turned the corner in June and are buying stocks in anticipation of better earnings. In another are those saying high unemployment and struggling consumers warrant more caution about owning stocks.

"I'd expect some volatility between bulls," and the bears, he said.

The bulls won last week, driving the Dow Jones Industrial Average ($INDU) back over 10,000 and pushing the benchmark indexes to their best weekly gains in four weeks.

In recent weeks, however, it hasn't taken much for sentiment to swing the other way, with some reversals tied to third-tier economic releases, such as consumer credit on Friday.

The opposing forces could play out next week as stock investors counter a steady stream of Federal Reserve speakers, an early-November poll on consumer sentiment and a report on the September trade gap.

Several companies tied to households' ability to spend, including Wal-Mart Stores Inc. (WMT), Walt Disney Co. (DIS), Nordstrom Inc. (JWN) and Beazer Homes USA Inc. (BZH), will report quarterly results.

Certain sectors, notably health-care and financials, may react to progress on legislation. Top Democrats were planning to hold a vote Saturday in the House of Representatives on a sweeping health-care reform bill. Legislation on bank reform is moving slowly through a House committee. See story on House bill.

And the U.S. dollar, whose 15% tumble from its March lows has supported higher commodities prices and U.S. companies' overseas earnings, could find some support if leaders from G20 nations over the weekend say anything specifically about the greenback's drop and the advances in their currencies. See G20 preview.

Too far, too fast?

Stock pickers are likely to view these various data points and events with one broad question in mind: What do they say about how fast the U.S. government will start taking away the extra cash thrown at the economy?

The trillions of dollars the Fed and Congress have directed towards the U.S. economy as it slipped into the worst recession since the 1930's, with such stimulus efforts mirrored in Asia and Europe, have played an integral role in driving the broader U.S. market.

The S&P 500 ($SPX) has rallied 60% off its March lows, as investors first bid up financials and other hard-hit sectors on belief that such efforts would stabilize the loss-ridden banking sector.

Some cyclical sectors such as energy, buoyed by a drop in the dollar that's made commodities more valuable, have taken over the lead.

Underpinning the stock market's gains in the past week, the Federal Reserve said it planned to keep rates near 0%, "for an extended period." A continuation of the Fed's easy money policy is considered good for stocks in the short term because it implies lower borrowing costs for consumers and businesses.

Nonetheless, the worry that governments will withdraw too soon, potentially cutting off a recovery before it really gets going, has lingered over stocks. As central banks in Australia and other faster-growing economies have started to raise rates, U.S. stock indexes have fallen from one-year highs.

"There will be considerable watching of comments from central banks," said John Stoltzfus, senior market strategist at Ticonderoga Securities in New York City.

"The risk that has entered the market is exit strategy risk," he said.

Investors will hear from Fed officials with a range of views, including San Francisco Fed President Janet Yellen, who has voiced more concerns about growth, and Dallas Fed President Richard Fisher. In the past, he has worried more about inflation risks.

Earnings wind down

Economic data has returned as a main driver of stock action as third-quarter results wind down.

On Friday, a surprise jump in October's jobless rate whipsawed stocks as investors analyzed some of the report's details. See full story.

Still, results from a handful of consumer companies could sway sentiment.