Encouraging news from Europe helped ignite stock prices in October. This week, investors will shift their focus to U.S. economic data, which might temper their exuberance.
Three events this week will command attention: the U.S. jobs report for October, the Federal Reserve's policy meeting and Fed Chairman Ben Bernanke's quarterly news conference.
A report Thursday showed that the U.S. economy expanded at a solid 2.5 annual rate in the July-September quarter. That helped ease concerns that another recession might be nearing.
Yet the news may have also raised unrealistic expectations about the economy. Investors could end up disappointed.
"There's a big difference between avoiding recession and stronger growth," said Eric Green, chief U.S. economist at TD Securities. "The economic data will be OK, but it's not going to be a catalyst to move stocks up" significantly.
Last week, investors were cheered by the deal European leaders reached Thursday. European banks agreed to take a 50 percent loss on their holdings of Greek government bonds. They will also set aside more money to cushion against future losses.
Leaders also pledged to expand the European Union's bailout fund.
The announcement catapulted U.S. stocks. The Dow Jones industrial average rocketed 339 points Thursday and appears headed for its sharpest monthly gain since 1987.
Economists caution that European officials must still fill in the details of their plan and implement it. Even then, it might not work. When world leaders meet in France on Thursday and Friday, investors will want to see signs that China and other nations are prepared to help bolster Europe's bailout fund.
For all that, some stock analysts remain bullish.
"The market was priced for meltdown, and didn't get it," Green said. "However inadequate the European package may appear, it is a decisive step in the right direction."
Stocks had plummeted in September over fears that Europe's debt burdens would trigger a financial catastrophe. With those fears fading, U.S. stock prices looked cheap last week, analysts said.
The U.S. economy appears more resilient than it did in August, when worries had grown that the United States would fall back into recession. Consumers' sentiment tumbled that month after Congress fought over raising the nation's borrowing limit and Standard & Poor's downgraded long-term U.S. debt.
Yet the economy managed to expand in the July-September quarter at the healthiest pace in a year. Despite their gloomy outlook, consumers spent more. Companies increased their investment in software and equipment.
The focus on Europe "taught us something very important," said David Kelly, chief market strategist at J.P. Morgan Fund. "Despite all the turmoil in Europe and the drop in confidence caused by it, the U.S. economy is still growing."
All that makes the Fed less likely to announce any new steps Wednesday at the end of its two-day policy meeting. Several members of the policy committee have suggested more action may be needed to try to help the economy — perhaps another round of bond purchases to further cut long-term interest rates. But few analysts expect any such announcement yet.
Three of the 10 members of the policymaking committee have dissented from the Fed's smaller-scale efforts to boost growth in recent months. Two of the three are scheduled to lose their voting privileges in 2012.
Investors might welcome a quiet Fed meeting, analysts said. It would suggest that the economy might be able to recover on its own.
"Every time the Fed administers medicine to the economy, it convinces people that the economy is sick," Kelly said. "There would be incredible cheering if the Fed decided that the economy is on the mend and no further action is required."
Also Wednesday, the central bank will update its economic forecasts, which Bernanke will discuss at his news conference. The Fed is expected to revise down its estimates for hiring and growth from its last forecast in June. Investors will scrutinize how Bernanke explains any such revisions.
The Fed's meeting will be followed by the most closely watched economic indicator the government releases: the monthly jobs report.
The economy is growing, but not enough to generate many jobs for the 14 million people unemployed. Employers added 103,000 net jobs in September. That wasn't enough to lower the unemployment rate, which has been stuck 9.1 percent for three months.
Analysts expect roughly 100,000 jobs to be added in October. Anything less could raise concerns that the economy may slow. Stocks might stumble.
A gain of 100,000 jobs is scarcely enough to keep up with population growth. More than double that total would be needed consistently to reduce unemployment significantly.
"The jobs report will be a sobering reminder ... that all is not well with the economy," said Dan Greenhaus, chief global strategist at brokerage firm BTIG.
This week will bring other economic reports, too. The Institute for Supply Management, a trade group of purchasing executives, will issue its surveys of purchasing managers for manufacturing and service-sector companies. Those will provide early reads of whether growth will accelerate in the final three months of the year or drop back.
And automakers will report their October sales, a gauge of whether consumers are willing to make big purchases. Consumer sentiment has fallen to recession levels. But that doesn't necessarily mean shoppers will reduce their spending.
The auto sales data, in particular, will show "what the consumer does, not what the consumer says," said Jerry Webman, chief economist at OppenheimerFunds.