Weekly Wrap

Here is a copy of Briefing.com's Weekly Recap:

With Monday being a holiday for market participants, it can be said that the week began on a good note. Thanks to a late rally on Friday, it ended on one too.

Throughout the week an assortment of economic concerns - or perhaps we should say economic terms - kept many buyers away from the action.

The market appeared to be unsettled by inflation concerns at certain times, by recession concerns at others, and by the specter of stagflation still at others. No matter the worry, or the term, none of it had an attractive ring to it.

Rising commodity prices, a jump in consumer inflation, cautious earnings guidance from retailers Wal-Mart (WMT) and J.C. Penney (JCP), a weak regional manufacturing report, and new economic projections for 2008 from the Federal Reserve, which included a downward revision to the GDP growth forecast and upward revisions to the inflation and unemployment rate forecasts, were overriding influences during the shortened week of trading.

Fortunately, it wasn't all negative. Dow component Hewlett-Packard (HPQ) had a great quarterly report that was replete with better than expected fiscal year guidance, weekly initial claims fell 9K to 349K to remain well below typical recession-like levels, and Blackberry maker Research In Motion (RIMM) said its net subscriber account addition will be 15% to 20% higher for its fiscal fourth quarter than previously projected.

Separately, the continued surge in commodity prices across the agricultural, precious metal, and energy complexes caught everyone's attention. By way of example, wheat prices rose 2.2% to $10.64 per bushel, gold prices surged 4.6% to $947.80 per ounce, and oil prices jumped 3.7% to $98.96 per barrel. Earlier in the week, gold and oil prices hit new, non-inflation adjusted highs of $958.40 and $100.86.

The move in commodity prices combined with the Bureau of Labor Statistics report on Wednesday that consumer prices rose 4.3% year-over-year in January and 2.5%, excluding food and energy, were the primary items feeding the market's inflation concerns.

In expected fashion, the CPI report led to a decidedly lower start for the stock market on Wednesday, but remarkably the major indices all rebounded sharply in the afternoon trade to finish comfortably above the unchanged mark.

The reversal of fortune was helped along by a sense of relief that early losses weren't any worse than they were and minutes from the Jan. 29-30 FOMC meeting that indicated members felt inflation expectations would remain reasonably well anchored.

The latter view aside, the Fed still raised its core inflation forecast for 2008 to a range of 2.0% to 2.2% from 1.7% to 1.9%. In turn, it cut its 2008 GDP forecast to a range of 1.3% to 2.0% from 1.8% to 2.5%. The takeaway for the market was that the updated forecasts continue to support the view that further rate cuts remain likely.

A regional manufacturing report from the Philadelphia Fed on Thursday reinforced the rate cut notion as it checked in at -24.0 versus a consensus estimate of -10.0. A number below zero is meant to indicate a contraction in manufacturing activity. The major averages sunk on this news as the report played into recession fears. Conversely, Treasury prices rallied as it was the type of report that suggested inflation pressures should moderate and that the Fed should cut rates again.

Friday's trade wasn't looking any better as persistent concerns about deteriorating earnings prospects in the financial sector took the Dow, Nasdaq, and S&P down as many as 129, 34 and 15 points, respectively, at their lows for the session. Then, the market stormed back in the final 45 minutes of trading.

The catalyst for the sudden turn was a CNBC report that a bailout plan for bond insurer Ambac Financial (ABK) that would enable it to retain its triple A rating could be announced as early as Monday or Tuesday. This news led to a large wave of buying interest and a short-covering rally that left the Dow, Nasdaq and S&P up approximately 97, 4 and 11 points, respectively, at the closing bell.

Importantly, the late rush of buying activity saved what was shaping up to be a losing week for the broader market and helped the Nasdaq and Russell 2000 curtail their losses.

So, while economic concerns got plenty of press this week, it may surprise many readers to know that the stock market isn't embracing those concerns in earnest fashion like it did in late 2007 and in January. To wit, the Dow Jones Transportation Average, considered to be a leading indicator of economic activity, is up 2.4% for the year. Meanwhile, the consumer discretionary sector is down just 2.6% and the financial sector, down 7.4%, is slightly outperforming the S&P 500, which is down 7.9%.

It is still too early, admittedly, to sound the all-clear signal, yet the outperformance of the aforementioned groups suggests the stock market's economic view isn't as dour as many sources like to indicate. Arguably, it has a slant to it that suggests a reflation trade is winning out right now over a recession trade.