A Strong Finish to a Rocky Week

Investors brushed off accounting concerns to snap up blue chips. Next week, expect to see more signs that the economy is recovering

Stocks staged a late-day rally Friday, led by traditional blue chip cyclicals, to end a rocky week in the markets. Energy and consumer stocks also rose, while the consumer electronics sector declined.

The Dow Jones industrial average surged 133.40 points, or 1.36%, to 9,968.15, led by manufacturing giant 3M (MMM ), household products maker Procter & Gamble (PG ) and oil giant ExxonMobil (XOM ). The Nasdaq composite gained 8.30 points, or 0.48%, to 1,724.54. And the broader Standard & Poor's 500 index rose 8.89 points, or 0.82%, to 1,089.84.

Investors should expect to see more evidence that the economy is in recovery mode next week. The economic calendar is heavy, starting off with Monday's report on housing. S&P MMS expects to see existing homes sales rise 2.1% to a 5.30 million unit annual pace in January, as low mortgage rates and warm weather appear to have given the housing sector a boost.

On Tuesday, February consumer confidence is expected to slip to 97.0 from 97.3 in January.

Next Wednesday brings the biannual testimony from Federal Reserve Chairman Alan Greenspan before the House Financial Services Committee. His appearance will be watched for any clue as to the timing of the FOMC moving to a neutral policy stance. Reports on durable goods orders and new home sales for January are also due.

On Thursday, MMS sees an upward revision in fourth quarter gross domestic product to 0.9% from the 0.2% gain previously reported. The GDP revision will be significant because it will include large upward revisions in the sales components that will raise prospects for 2002, and it will largely rule out the likelihood that GDP actually declined during the quarter, says MMS. Thursday also brings the Chicago PMI report. MMS sees another jump in the index to 47.0.

The final University of Michigan sentiment report for February is due on Friday. Accounting concerns are expected to temper consumer confidence, as seen in the surprise dip in the preliminary reading. Also, S&P MMS sees Friday's report on the national ISM index (formerly NAPM) for February topping the 50% boom/bust threshold.

The markets rode a roller coaster this past week. Earlier in the week, the Nasdaq posted big declines, while the Dow briefly crossed the 10,000 mark as the markets struggled for direction amid more reports of Enron-like accounting woes and worries about valuation and earnings outlooks.

"Professional investors-- like money managers, brokers and analysts-- are really beginning to moan about how horrible the market is," says Michael Farr, president and chief investment officer at Washington, D.C. investment firm Farr, Miller & Washington LLC. "But professional managers are decidedly bullish, so while everyone is feeling the pain, no one is throwing in the towel."

In fact, mutual funds had $5 billion in inflows last week, according to Trim Tabs, with $3.8 billion being directed toward aggressive growth funds. And Farr says that with the enormous liquidity placed in the market from the Federal Reserve's moves, lower interest rates, and the collapse in inventories, business spending will eventually resume and earnings will eventually increase enough to satisfy current multiples.

But investors were ready to pull the trigger as headlines emerged about accounting problems. In the latest development, The Wall Street Journal reported that the Federal Reserve is examining JP Morgan Chase's (JPM ) accounting for commodity-related trades with Enron, according to internal central-bank documents. JP Morgan shares fell in heavy volume Friday.

Investors also focused on a merger news Friday. Northrop Grumman (NOC ) made an unsolicited offer Friday to acquire TRW (TRW ) for $47 per share, or about $5.92 billion. The bid came only days after TRW CEO David M. Cote resigned to become chief of Honeywell International (HON ). On Friday, S&P Ratings placed TRW on CreditWatch with negative implications.

On the earnings radar, electronics retailer Circuit City Group (CC ) shares fell after it warned that weaker sales at its stores in January and February, along with higher costs related to its exit from the appliance business, will drag fourth-quarter EPS lower that it expected, to $0.70 to $0.74. It sees fiscal year 2002 EPS of $0.89 to $0.93. The retailer also says it will spin off its CarMax used-auto business.

In the tech sector, chipmaker Xilinx (XLNX ) raised its fourth quarter revenue forecast to up 10% sequentially. Design software maker Autodesk Inc. (ADSK ) reported fourth quarter pro forma EPS of $0.65, higher than expected, on a 4.5% revenue rise.

Meanwhile, brewers rose after Anheuser Busch (BUD ) raised its 2002 EPS outlook, prompting Banc of America to upgrade the stock to buy.

Treasury Markets

Treasuries were higher in price, sending yields lower, as investors sought safety amid the weakness in global stock markets. There was nothing on Friday's economic calendar to divert the market's attention. The dollar traded lower against the euro and yen.

World Markets

European stocks fell, led by phone companies. In London, the FTSE 100 index ended with a loss of 22.60 points, or 0.45%, to 5,050.70 in reaction to the U.S. market slide and the uncertain outlook. In Germany, the DAX index lost 105.15 points, or 2.17%, to 4,745.58 on worries about the German economy. Deutsche Telekom AG said it sees little chance of selling cable-television networks that it had planned as part of its debt-reduction effort.

In France, the CAC 40 dropped 42.02 points, or 0.98%, to 4,245.20 following a report that French GDP fell 0.1% in the fourth quarter as exports slumped. Orange SA fell amid speculation France Telecom SA will sell stock in its cellular unit to cut debt.

Asian markets ended mixed as stronger sentiment on hopes for anti-deflation measures and financial reforms was offset by weakness in U.S. stocks. In Japan, the Nikkei rose 61.36 points, or 0.60%, to 10,356.78. In Hong Kong, the Hang Seng lost 123.96 points, or 1.15%, to 10,664.94.

By Karyn McCormack in New York

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