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Earnings barrage continues, GDP out this week

Investors would like a definitive answer to the question: Is the economy in fact in recovery?
/ Source: The Associated Press

Investors would like a definitive answer to the question: Is the economy in fact in recovery? The answers this week may not be conclusive, but they might remove some of the uncertainty that has made stock trading choppy lately.

Investors will get the Commerce Department's first report on third-quarter gross domestic product, the broadest measure of the economy's health. The week will also bring reports on housing prices and new home sales, consumer confidence and durable goods orders, a key indicator for the manufacturing industry.

And earnings reports, which investors are viewing as economic data these days, will continue to flow in. Results from companies including Kellogg Co., Procter & Gamble Co. and Visa Inc. will provide more insight into consumer spending. Reports from several major energy companies, including ConocoPhillips and Exxon Mobil Corp., as well as insurers Aetna Inc. and MetLife Inc., are also expected.

Coming off a rocky week, investors are looking for more evidence that the economy is in recovery. The market's volatility has increased as investors contend with mixed messages from earnings reports and economic data, and question whether a seven-month surge in stocks has outpaced companies' earnings potential.

After stepping to new highs for the year on Monday, stocks zigzagged sharply and finished the week slightly lower as optimism about mostly upbeat earnings was offset by disappointment over a housing report, an analyst's downbeat assessment of Wells Fargo & Co. and cautious outlooks from major railroad companies. The Dow Jones industrial average fell 0.2 percent for the week, the Standard & Poor's 500 index lost 0.7 percent, and the Nasdaq composite index slipped 0.1 percent.

"This really appears to be a market that is trying to sort itself out," wrote Dan Cook, senior market analyst at IG Markets Inc., in a research note Friday.

So far, earnings reports have largely exceeded Wall Street's expectations. About 40 percent of the companies that make up the S&P 500 have reported their results, with 81 percent of those beating analysts' estimates. The market wants to see that trend continue.

Some investors are still uneasy about the way businesses are making money, and would like to see more evidence that sales rather than cost-cutting are the foundation for companies' profits.

"A lot of it is very cost-driven," said Drew Kanaly, chairman of Houston-based Kanaly Trust. "You're really not seeing revenue growth. You're seeing significant cost savings and you can't do that forever."

However, with business operations so lean, analysts say any slight increase in demand should fuel significant sales growth in the coming quarters.

Aside from earnings reports, economic data continues to point to an economy that is healing but at a slow pace. Last week investors got mixed signals on the housing industry from separate reports showing a sharp drop in home building permits, an indication of future construction, and a big jump in existing home sales.

"The numbers seem to be confirming that we are in a recovery, (but) that recovery is likely to be quite sluggish and uneven," said Carmine Grigoli, chief investment strategist at Mizuho Securities USA Inc.

With the market up roughly 60 percent since early March, those kinds of muddled messages on the economy have given investors an excuse lately to cash in some of their gains, he said.

"The market doesn't need much motivation to take profits," Grigoli said. "But it's not likely to lead to a significant pullback. There are just too many positives out there."

The market could get a big boost of confidence this week if the GDP report shows the economy grew in the third quarter for the first time in a year, as expected.

The market is anticipating that the economy rebounded to an annual growth rate of about 3.1 percent in the July-September period. That would be a big improvement after four straight quarterly declines, including a 0.7 percent drop in the second quarter, as the country endured the longest recession since the 1930s.

If the report falls short of expectations, that could upset the market and drive more selling.