The market managed to close mostly higher Friday, locking in strong weekly gains, after a dismal March jobs report, which revealed a third consecutive month of declining payrolls and a jump in the unemployment rate.
"The market has pretty much priced in a pretty good portion of the recession scenario," said Owen Fitzpatrick, head of U.S. equity at Deutsche Bank.
"Given that the Fed is doing what it can to pull us out of this, the market is expecting a shallow and short recession, not a deep and extended one," he added.
On Friday, the Dow Jones Industrial Average closed down 16.61 points to 12,609.42, but it sat on a weekly gain of 3.2%.
The broad S&P 500 Index rose 1.09 points, to 1,370.40, giving it a sturdy 4.2% rise from where it stood last week.
The Nasdaq Composite Index climbed 7.68 points to 2,370.98, and it rose 4.9% from where the tech-heavy index stood one week ago.
The market generally has been trending higher over the past three weeks. "Sentiment toward equities suddenly appears to be shifting from outright gloom to more of a light-at-the-end-of-the-tunnel scenario," according to Robert Kavcic, analyst at BMO Securities.
Wishing the crisis away
Stocks rallied markedly Tuesday, with the market impressed by the ability of both Lehman Brothers Holdings Inc. and UBS AG to raise capital in the current depressed state of credit markets.
Ever since the near-collapse and subsequent bailout of investment firm Bear Stearns Cos. , the market is hoping that the worst of the credit crisis that has shaken global markets since last summer now is past.
The full impact of the crisis, along with the continued slump of the housing market on the U.S. economy remain to be fully determined.
On Wednesday, Federal Reserve Chairman Ben Bernanke for the first time acknowledged that the economy might enter into recession, which gave a brief pause to the market.
But the market continued higher through the week. "The market wants to believe that this will be a mild recession," Kavcic said, adding that this remains the basis for the market's continued uptrend so far.
"Stock have historically bottomed about two-thirds of the way through a given recession," he commented. "So if the current downturn lasts through the second quarter, a turnaround in stock prices here would not be out of whack with the norm."
The market's recovery, however, might be challenged by the first-quarter earnings season, which officially kicks off next week with Alcoa Inc.'s results Monday.
Many analysts believe that earnings expectations remain too high for 2008, and the market will be on watch for lower forecasts or cloudy outlooks.
"That's the one missing leg out of this three-legged stool," Deutsche Bank's Fitzpatrick said. "We need positive earnings momentum, and we're going to enter into an adjustment phase leading to a reduction in earnings expectations."
With ailing financial firms weighing on the overall picture, first-quarter earnings for S&P 500 companies are expected to decline 10.9% from the year-ago period, according to a consensus of analysts estimates compiled by Thomson Financial.
In the fourth quarter, aggregate earnings fell 25.1% then, the worse quarterly performance since at least 1991.
Besides financials, consumer discretionary and many technology stocks will be in focus with lower consumer spending expected to affect overall results.
Yet investors took heart earlier this week in a smaller loss than forecast from electronics retailer Best Buy Co. and better than expected results from BlackBerry maker Research In Motion Ltd. br>
"This is not a typical capital-spending led recession, and most sectors didn't experience the usual excess inventories and should hold up pretty well," Fitzpatrick commented. "With continued global growth, we should get some bright spots from companies with overseas earnings, while banks should report what's already fairly well expected."
Other than Alcoa's results, General Electric Co.'s report Friday will be parsed, given the conglomerate's broad-based involvement in global businesses.
Wednesday will bring Circuit City Stores Inc.'s results before the market's open, and Bed Bath & Beyond's after the close.
The market also will continue to monitor data that might provide clues on the economy, and whether the Federal Reserve will continue cutting interest rates. Following Friday's employment numbers, the market increased its bets that the Fed will cut rates by half a percentage point at its next meeting at the end of April.
Of note next week will be the minutes of the Fed's March meeting on Tuesday, weekly jobless claims and February trade figures on Thursday, along with March import prices and the Michigan consumer-sentiment survey on Friday.
By Nick Godt