Coming off its worst week since November, Wall Street is now wondering whether its late-2008 optimism about the economy was misguided -- or at least premature.
The beginning of companies' fourth-quarter earnings reports this week will be more anxiety-provoking than usual for investors after Alcoa Inc. and Intel Corp. warned last week that they were being hit hard by the recession.
And the week's economic news, especially the Federal Reserve's region-by-region assessment of business conditions -- its beige book -- will be more worrisome after word Friday that the unemployment rate soared to a 16-year high of 7.2% during December.
Last week's news wasn't particularly surprising, but it was nonetheless unsettling to a market that had appeared to be starting a recovery. The Dow Jones industrial average fell 4.8% for the week, its biggest percentage loss since the week ended Nov. 21. The Standard & Poor's 500 index slid 4.5% and the Nasdaq composite index declined 3.7%.
The S&P 500 is still up 18.3% from its Nov. 20 low, and last week's selling could have been worse. But, said Joe Heider, president of Dawson Wealth Management in Cleveland, "You're seeing volatility return to the market as a result of some of these numbers being much worse than expected."
Alcoa, which releases its fourth-quarter results today, said it would cut 13,500 jobs, or 13% of its workforce, on falling demand for its aluminum products overseas. And chip maker Intel, which reports its earnings Thursday, lowered its fourth-quarter revenue forecast for a second time.
Investors took the bad corporate news, compounded by Wal-Mart Stores Inc.'s lowering of its fourth-quarter forecast because of weak holiday sales, as a sign that their optimism might not have been justified.
"I think investors were implicitly assuming that the very worst news about the economy would be in the fourth quarter of 2008," said Chris Probyn, chief economist at State Street Global Advisors.
Corporate warnings also have made it harder for investors to keep shrugging off bad economic numbers. The fear on the Street is that the economy won't turn around soon if companies are struggling.
On Friday, stocks faltered as the Labor Department's employment report showed companies cut 524,000 jobs in December. Although the decline was smaller than forecast, the unemployment rate jumped to 7.2% from 6.8% in November, more than the 7% predicted.
