And despite that robust performance, the Dow was the laggard among the three major U.S. stock indices. The tech-laden Nasdaq Composite Index soared 10.6% while the broader Standard & Poor’s 500 Index edged it with a weekly gain of 10.7%.

Fuel for the rally came from several sources. Stocks had sold off sharply coming into last week. But then such beleaguered banks as Citigroup Inc. (C), Bank of America (BAC) and JP Morgan Chase & Co. (JPM) started to talk somewhat bullish about earnings.

The rally was a confluence of forces. There was a significant sell-off coming into this week, as well as a dearth of positive news, then Citigroup, Bank of America, and JPMorgan Chase started talking about earnings and Washington was supportive on a couple of levels.

Investors also were encouraged by comments made by National Economic Council Director Larry Summers, who in a rare public appearance contended consumer spending appeared to have stabilized, according to TradeTheNews.com.

But the question now becomes: Where do we go from here?

Art Hogan, chief market strategist at Jeffries & Co. (JEF), said that “what’s important is we haven’t retraced any of the week’s moves. Even if it’s a bear market rally, the good news is the duration.”

The stock market is a discounting mechanism, meaning it prices assets according to what will happen, as opposed to what is happening right now.

But whether this is a kind of “dead-cat” bounce – with more bloodletting to come – or is the start of a sustained rally that signals a turnabout in the U.S. economy – is just too early too early to call.

Some key things to watch this week:

• The continued analysis of this weekend’s G20 meeting and subsequent recommendations.
• U.S. Federal Reserve policymakers meet Wednesday; although they cannot cut interest rates any more, investors will watch to see what other moves the central bank could make and – just as importantly – what policymakers will have to say. Some analysts are speculating the central bank may choose to purchase long-term Treasury bonds or even additional Fannie Mae (FNM) or Freddie Mac (FRE) debt.
• Investors also will be getting insights into the economy’s health with reports on jobless claims, housing starts, industrial production and inflation at both the consumer and wholesale level.

Market Matters

Citigroup announced that its first quarter would actually show positive earnings and other financials followed with similar projections. Citi Chief Executive Vikram S. Pandit stated that the one-time megabank has been profitable for the first two months of the year and JP Morgan Chase’s top exec echoed the cheerleading on his own institution’s behalf.  Not to be outdone, Bank of America’s Kenneth D. Lewis claimed that his bank should not need any additional government capital.

Freddie Mac lost $24 billion last quarter and needs another $30 billion in bailout funds; Merrill Lynch & Co. Inc. stands accused by the New York Attorney General of misleading Congress (and investors) about its bonuses.

Oil rose late in the week to close above $46 a barrel as traders speculated that the Organization of the Petroleum Exporting Countries could limit production even more at its weekend meeting after an energy agency cut demand projections by another 200,000 barrels a day.  Investors welcomed news that Citi’s situation may not be quite as dire and continued buying on rumors that the Financial Accounting Standards Board (FASB) may suspend mark-to-market rules.

Financials led the rally and healthcare climbed as well on the merger news concerning deals involving, first, Merck & Co. Inc. (MRK) and Schering-Plough Corp. (SGP), and, second, Roche Holding AG (ADR: RHHBY) and Genentech Inc. (DNA).

Economically Speaking

On the heels of the upcoming G-20 meeting, U.S. President Barack Obama suggested a more coordinated stimulus effort to help revive the worldwide downturn. His remarks were not very well-received by some of his trading partners, who felt that Obama insinuated the Europeans weren’t doing enough to jumpstart their respective economies.

Meanwhile, China lashed out at U.S. officials about the outlook for the domestic economy and, in particular, U.S. Treasuries [For a related story in today's issue of Money Morning, please click here]. As America’s largest creditor nation, China remains concerned about its investments in U.S. securities in light of the mass spending on domestic issues.

While the economic calendar was relatively light, the actual numbers offered a tad bit of “promising” news. Retail sales dropped 0.1% in February, but actually climbed once auto activity (rather inactivity) was dropped from the equation. In fact, businesses as diverse as furniture, electronics, and attire all experienced sales increases last month. The revised January retail number depicted the best increase in level of activity in three years.

The U.S. trade deficit shrank for the sixth straight month in January and now stands at its lowest level since October 2002. Declining imports and exports revealed further contraction in the global demand for goods and services. The weaker labor market remained quite concerning as claims for unemployment benefits have set records in six of the past seven weekly releases.

Weekly Economic Calendar

Source: Will Last Week’s Rally Carry Over?

The monthly ADP Employer Services (ADP) survey – which tracks private non-farm payroll employment – stunned economists, showing a surprising increase from the 476,000 jobs lost in November.

The decline was the worst in the history of the survey, which began reporting in 2001. And if the findings are matched by the official government jobs report, due out Friday, it would be the biggest employment drop since the U.S. recession of 1975.

“This is an eye-poppingly bad number,” Art Hogan, the New York-based chief market analyst at Jefferies & Co. (JEF), told Bloomberg News. “The economy is in very difficult shape and that’s been proved out over the economic data from the past month.”

In fact, the numbers echo a trio of downbeat economic reports from the manufacturing, housing and service sectors reported by Money Morning just yesterday. Those numbers very graphically portray the severity of the current recession.

The economy has shed 1.9 million jobs this year as payrolls have dropped the last 11 straight months. U.S. companies slashed 533,000 jobs in November, according to the U.S. Commerce Department, and the unemployment rate grew to 6.7%, its highest level since 1974.

Unemployment numbers are considered by economists to be a snapshot of the health of both the labor markets and broader economy.

Job losses of this magnitude have a profoundly negative impact on the U.S. economy – and major ripple effects on economies worldwide – because jobless consumers are forced to cut back on spending. Fully 70% of all domestic economic activity is powered by consumer spending.

Stocks Can’t Weather the Storm

In response to the latest news, U.S. stocks slid and experienced their worst losses in two weeks, reversing a pattern in which investors seemed to be ignoring bad news as they bid up shares and notched steady gains.

The Dow Jones Industrial Average fell 245.16 points, or 2.72%, to close at 8,769.94. The Standard & Poor’s 500 Index declined 28.05 points, or 3.0%, to close at 906.65. The tech-focused Nasdaq Composite Index fell 53.32 points, or 3.23%, to end the day at 1,599.06.

Intel Corp. (INTC) and Alcoa Inc. (AA) exacerbated the slide, providing still more evidence of declining corporate revenue and layoffs. Intel projected that fourth-quarter revenue would fall 23% from 2007 levels because of weak demand, while Alcoa announced it will eliminate 13,500 jobs, or 13% of its work force.

Intel shares dropped a little more than 6.0% yesterday, while Alcoa shares shed more than 10% of their value.

“These are extraordinary times, requiring speed and decisiveness to address the current economic downturn,” Alcoa’s Chief Executive Officer Klaus Kleinfeld told MSNMoney.

The hardest-hit U.S. business sector was the service sector, which lost 473,000 jobs in December. The two other hard-hit sectors were consumer goods, which shed 220,000 jobs, and manufacturing, which jettisoned 120,000 workers.

“December does typically see seasonal hiring for the holiday season and plainly the anticipation of poor Christmas sales has played a major role in pushing down the adjusted numbers,” Alan Ruskin, an analyst at RBS Global Banking & Markets (ADR: RBS) told The Financial Times.

Official Government Report on Tap Friday

All eyes now turn to the afore-mentioned official government labor report, due on Friday. If the results match it would represent yet another historic number, making it the biggest employment drop since the 1975 recession.

ADP collects a wealth of information as it processes 500,000 payrolls for U.S. companies with aggregate employment of more than 24 million. It issues its report two days prior to the government report.

After it significantly undershot the government labor report in November, ADP changed its methodology “to improve the correspondence between nonfarm private employment estimates, and estimates published in the government report,” according the company’s website. Even so, some economists are revising their forecasts upwards.

“The drop in ADP employment in December is staggering and suggests that our original projection of a 500,000 decline in payrolls in December is too small,” RDQ Economics economists John Ryding and Conrad DeQuadros wrote in a research note.

The official employment numbers on Friday could show that as many as 700,000 jobs were lost in December, according to Ian Sheperdson, chief economist at High Frequency Economics. That would be the biggest drop in 59 years.

“This is shockingly awful,” Mr Sheperdson said. “We await Friday with trepidation.”

Source: Stocks Fall as ADP Report Says U.S. Shed 693,000 Jobs in December