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Market Update

The Week In Review: Anyone for Exuberance?

Mixed economic news and lack of bad news fuel optimism.

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The stock markets moved higher this past week as the Taliban surrendered, and the recession didn't.

The American-lead war in Afghanistan made more progress as the beleaguered country's erstwhile rulers yielded their final urban stronghold of Kandahar.

Investors seemed more focused on the homefront, however, as stocks, lead by technology issues, staged a powerful midweek rally and propelled the major indexes to levels they had not seen since before the September 11 terrorist attacks.

Heartening economic reports about the state of the manufacturing and services sectors, as well as indications of rising consumer confidence helped fuel optimism. Sobering economic reports, including reports of sluggish November retail sales and rising unemployment, tempered enthusiasm later in the week.

For the week, the Dow Jones Industrial Average rose about 3.5% to 10,049. The Nasdaq Composite index rose 4.7% to 2,021. The S&P 500 index increased 1.6% to 1,158.

Fund Category Returns
Through Thursday, every domestic-stock fund category had improved for the week, though the specialty-utilities category was on the edge of posting a loss for the week.

Technology funds led the way again. Invesco Technology (FTCHX) beat even leveraged index funds that follow Dow Jones' Internet and semiconductor indexes with a 17% gain through Thursday.

This past week contract manufacturers, like Flextronics (FLEX) and Celestica (CLS), and semiconductor stocks, like Microchip Technology (MCHP) and Maxim Integrated Products (MXIM), helped the fund that keeps nearly a third of its assets in semiconductor and related stocks.

Though Invesco Technology tends to be fairly concentrated in a couple of industries, the offering is one of the more broadly diversified tech funds in terms of individual stocks. The fund has lost scads of money over the last two years (how many tech funds haven't?), but manager William Keithler has been able to keep it at or above the tech-fund average during his tenure.

Government-bond funds suffered last week. The longer the maturity of the bond the more the misery.

A mix of improving and not-as-dismal-as-before economic data--such as the week's reports from National Association of Purchasing Managers that showed signs of stabilization in the manufacturing sector and growth in the service sector--got people excited about an economic recovery and about stocks.

Such circumstances tend to be bad news for bonds. American Century Target Maturity 2025 (BTTRX) was the worst fund in the long-government category, falling 4.6% over the five days through Thursday. The biggest fund of the group, Vanguard Long-Term Treasury (BLAGX) fell 2.3% for week through Thursday.

Sector and Industry Returns
The technology sector ruled the roost again this week, as the chief executives of Cisco Systems (CSCO) and Oracle (ORCL) expressed a little optimism.

The network-equipment titan's captain, John Chambers, said sales were on track to meet November expectations and the company may even grab a little market share this quarter.

Oracle's honcho Larry Ellison boldly predicted the software company would expand its margins to 50% when the economy recovers thanks to recent streamlining.

Investors hungry for any bit of good news after a long drought took this information and ran with it, pushing Oracle up 13% for the week and Cisco up 3.5%. Cisco's dominant industry positions and leadership make it a strong core holding, said Morningstar stock analyst Jay Ritter. Oracle will certainly enjoy fatter margins when the economy bounces back, but 50% may be a bit optimistic, said Morningstar stock analyst Joe Beaulieu. 

Auto retailing was the best-performing industry of the week. One of the leaders was autopart and accessory seller AutoZone (AZO). It reported on Tuesday that its fiscal first-quarter earnings jumped by 56% to $0.76 per share, which blew away analysts' estimates of $0.60 per share. 

Top Editorial
What do Causeway International Value and Munder Power Plus (MPFAX) have in common? They made Morningstar director of fund analysis Russel Kinnel's lists of best and worst new funds of 2001. You'll have to read the article to find out which one got plaudits and which one got panned. 

Morningstar Director of Stock Analysis Pat Dorsey wrote about how overly optimistic assumptions about pension fund returns can inflate company earnings. And stock analyst T. K. MacKay showed there is more to Chicago than gangsters, hardball politicians, and former world champion basketball teams that have fallen lower than shares of Enron (ENE). There are some pretty good companies based here, dealing in burgers, bowling, drugstores, network equipment, and airplanes. 

Day-by-Day Coverage
Monday: MedImmune, Aviron, Dynegy, Enron, Merrill Lynch, Lehman Brothers, Morgan Stanley, Ford Motor, Micron Technology. 

Tuesday: Coca-Cola Enterprises, JD Edwards, Dynegy, Cisco Systems, Magellan Healthcare Services.

Wednesday: AOL Time Warner, Philips Electronics, Oracle, Cisco Systems, Intel, Advanced Micro Devices, Texas Instruments, Micron Technology, Ford Motor.

Thursday: COR Therapeutics, Millennium Pharmaceuticals, Gap, Radio Shack, Wal-Mart, Target, Kmart, BJ's Wholesale Club, New York Times, Best Buy.

Friday: Intel, Advanced Micro Devices, E*Trade, Halliburton, Cooper Industries, AOL Time Warner.

Dan Culloton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.