NEW YORK (AFP) – Wall Street will keep a close eye on a key Federal Reserve policy meeting the coming week amid concerns the US economic recovery could stall following larger-than-expected job losses.

US shares ended the week higher despite a market-jolting report Friday showing the economy shed more jobs than expected in July.

Investors were concerned that economic growth, which resumed in the middle of last year after a brutal recession, could be derailed as unemployment remained at a high rate of 9.5 percent and as Americans keep their wallets tightly shut.

With interest rates at virtually zero percent, analysts suggested the Federal Reserve rate-setting body’s meeting Tuesday could consider other monetary policy-based stimulus.

It includes action by the central bank to directly pump money into the economy again, like it did at the height of the financial crisis.

“Investors may be anticipating an extension or expansion of the Fed?s policy of quantitative easing, or massive purchases of Treasuries and other securities to provide further liquidity to the economy,” said analyst Frederic Dickson at D.A. Davidson & Co.

“The rumors of quantitative easing have been a good part of the recent rally in stocks, so if the data continue to come in relatively benign, and the Fed does nothing, it’s hard to say that this rally will be sustained,” cautioned Wells Fargo analyst Gina Martin.

Despite persistent economic concerns, the Dow ended the week 1.8 percent higher on Friday at 10,653.56, the first time the blue-chip index closed above the 10,600 level since May 14.

The tech-rich Nasdaq composite index was up 1.5 percent over the week at 2,288.47, while the broader S&P 500 index jumped 1.8 percent at 1,121.64.

Aside from better-than-expected company earnings, investors were also buoyed by data earlier in the week showing business activity in the manufacturing and service sectors continuing to expand even as economic growth rates slowed this year.

The markets are also expecting actions by President Barack Obama’s administration to spur jobs and growth ahead of November midterm elections that could see his Democratic party lose control of Congress.

“With the midterm elections rapidly approaching, Congress and the Obama Administration simply do not have the luxury of patience with regard to the sluggish pace of job creation,” said analyst Philip Orlando at Federated Investors.

If the next monthly jobs report to be released in September does not begin to show stark improvement in the labor market, then Washington needs to come back “with their fiscal guns blazing and orchestrate an across-the-board tax cut for all consumers and businesses for at least the next two years,” he said.

During the upcoming week, the markets are expected to hear economic news that have a more positive spin overall, analysts at IHS Global Insight said.

For example, a government retail sales report for July could show sales modestly higher, they said.

With the first half of 2010 in the books, timid investors have shown a clear preference for bond funds over stock funds. Through the end of June, investors have poured about $139 billion into bond funds and just under $3 billion into stock funds, according to Morningstar. Year-to-date, long-term government bond funds are by far the best-performing asset class–returning more than 13 percent.

Investors have flocked to bond funds for a number of reasons, including concerns over a wobbly stock market and fears that the U.S. might fall into a double-dip recession. The flash crash in May (when the Dow Jones Industrial average fell by roughly 1000 points in intraday trading) didn’t exactly inspire confidence in stock market investors either. “There could be some really legitimate reasons for people pouring into bond funds,” says Miriam Sjoblom, Morningstar’s associate director of bond analysis. “It could be that in 2008 investors could discovered they owned too much of their portfolio in stocks for their risk tolerance.”

On the other hand, investors may not know what they’re getting themselves into entirely. “The returns and the opportunities that were available in 2009 were once-in-a-decade-type investment opportunities, so if you’re looking at the fixed-income market with those kind of expectations I would say you’re probably going to be disappointed in your returns,” says John Diehl, senior vice president in the retirement division at the Hartford.

[See U.S. News's list of The 100 Best Mutual Funds for the Long Term, and use our Mutual Fund Score to find the best investments for you.]

It’s important to make sure you’re making a well-informed decision. Whether there is a bond bubble brewing or not, here are four themes to consider when selecting a bond fund in today’s tumultuous investing climate:

Flight to safety. Diehl says his biggest worry is that the majority of the inflows into bond funds are driven by fear and panic. “If fear is the primary driver for why people are buying bond funds, then in my mind the biggest risk is an overconcentration in the most secure securities like treasuries,” he says. Regardless of what asset class investors are entering or exiting, they need to be aware of the importance of diversification. Treasuries are backed by the full faith and credit of the U.S. government, so they’re virtually the safest investment that money can buy. When there is a lot of uncertainty in the markets, investors generally rush into treasuries. Diehl is concerned that with treasury yields near all-time lows, investors aren’t being compensated enough for their investment.

Risk of interest rate hikes. There hasn’t been a clear indication of when rates will raise, but when you’re close to zero all you can do is go up, Diehl says. The Federal Reserve has kept the target range for the federal funds rate–what the Fed charges banks to borrow money on a short-term basis–between zero and 0.25 percent since December 2008 and repeated its pledge to keep rates low for an “extended period” since March 2009. “We’re in a 30-year decline in interest rates,” Diehl says. “If you think about 30 years of interest rate decline, it’s probably very easy for people to forget what happens in a rising [rate] environment.” Investors who are parked in ultrasafe investments like treasuries could see their returns slashed once the Fed finally raises rates.

[See When Will The Fed Finally Raise Rates?]

No one can predict exactly when rates will rise, but you can protect yourself by diversifying your bond investments by duration (a measure of interest-rate sensitivity), credit quality, and sector. Diehl suggests more investors consider investing in corporate bonds or even to a certain degree in high-yield bonds (which are generally more risky than other types of fixed-income asset classes). The Hartford currently believes that high-yield default rates in 2010 will be around 5 percent, while the default rate in investment-grade–or the highest quality–corporates will be below 1 percent. “So they look at that and say default losses should remain contained, therefore if you’re getting the yield advantage in those types of securities it may be good to diversify into that,” Diehl says. If investors get caught allocating too much of their portfolio in low-yielding, safer investments like treasuries then they could see major hiccups in their returns–or even losses–as interest rates are raised over time.

[See Is Your Portfolio Ready for A Double-Dip Recession?]

Abandoning money market funds. Sjoblom’s one concern is that many investors have deserted money market funds because they’re yielding almost nothing in today’s low interest rate environment. Through the end of June, money market funds have seen net outflows of more than $487 billion since the beginning of the year, according to Morningstar. While those money market funds may be yielding close to nothing, it may not be wise for investors to move money that they can’t afford to lose into riskier asset classes. “There have been tons of flows into short-term bonds funds and short-term muni funds, and I wonder if people really understand those funds can lose money if interest rates were to rise suddenly,” she says.

Be selective in the emerging markets. Of the almost $140 billion that has poured into bond funds, about $7 billion worth of investors’ money has made its way into emerging markets bond funds. Why the sudden inflows? One word: debt. Many developed nations like the U.S., UK, and some in Europe have massive deficits, while other emerging markets countries like China boast fiscal surpluses, fast-growing economies, and hungry consumers. “Their debt loads are significantly lower than their developed markets counterparts,” says Luz Padilla, portfolio manager of the DoubleLine Emerging Markets Fixed Income fund. Over the past year, the category has put up big numbers–returning about 20 percent. Padilla is optimistic about the potential for the asset class to do well, but she cautions investors that some of these short-term returns aren’t sustainable over the long run. Going forward, she believes investors should expect these funds to return somewhere in the neighborhood of 8 percent rather than 10-plus percent.

[See Why Emerging Markets Belong in Your Portfolio.]

If you’re interested in diversifying your portfolio through investments in emerging markets debt, Padilla has one warning: Be aware of country-specific risks. Emerging market countries present a lot of opportunities, but there are risks that go along with investing in countries whose businesses use less transparent accounting techniques and whose governments are often times unstable. While there are many funds out there that broadly track emerging market indices like the JPMorgan Emerging Markets Bond Index, Padilla believes investors need to be more selective. She points to countries like the Philippines and Venezuela, which both make up fairly large parts of the index. The Philippines, she believes, is overvalued. As for Venezuela, Padilla says she has stayed away from there for a long time because she believes there is a chance that one day Hugo Chavez could wake up and decide he didn’t want to pay off his country’s debt anymore. “What I’ve become wary of is when I start hearing people saying, ‘Oh I have to be invested in certain countries because I can’t be underweight a certain country or a certain region like Asia,’” she says. “To me that tells me that people aren’t necessarily doing their homework.”

Padilla also says investors need to dig down into exactly what kind of debt their fund is holding. She says many funds are heavy in sovereign debt right now (it makes up a large part of that index), but she says her team is focusing on shorter date high-quality corporate bonds for the time being because they present more attractive yields and the repayment risk is low.

NEW YORK – Investors cast aside worries of another recession last week and bought stocks by the bucketful. This week brings hard evidence of whether they were right.

A new earnings reporting season kicks off Monday with Alcoa Inc., followed by dozens of other companies over the next few days. A question on everyone’s lips: Will these second-quarter reports show that companies are feeling better about the future, too?

“We’ll find out soon enough what the reality is,” says Howard Silverblatt, a senior analyst at Standard & Poor’s.

After dumping stocks since late April, investors last week drove the Dow Jones industrial average up 5.3 percent, its best weekly performance in a year. Some analysts say stocks had simply gotten too cheap for investors to resist. Others point to an International Monetary Fund report that the world economy could grow faster than projected. That took some of the fear out of the market.

“The economy is running on two cylinders but the risk of a double-dip recession” has fallen, says Peter Buchanan, senior economist at CIBC World Markets. “The market could go higher.”

Certainly, that is the view of professional stock pickers. When investors were selling stocks week after week, eventually driving shares down 13.6 percent from their April peak, Wall Street analysts never lost faith in the future.

They’re projecting that second-quarter operating earnings of S&P 500 companies rose 42 percent, according to S&P’s Silverblatt. They also think operating earnings in the current quarter, which ends Sept. 30, will jump 31 percent over a year ago. And in the following three months, they’ll jump again — 28 percent.

Then it’s up, up and away.

By the end of 2011, S&P 500 index companies should be earning more than they did at the peak of the credit bubble in 2006 — if you believe the professional prognosticators.

With hurdles so high, all eyes are on profit reports now. Analysts say they’ll be paying at least as much attention to what executives say about future earnings as to what’s been generated so far. Those forecasts will tell investors whether last week’s burst of optimism was justified.

Some big reports to watch besides Alcoa’s: Intel Corp. on Tuesday, Google Inc. and JPMorgan Chase & Co. on Thursday and Bank of America Corp. on Friday.

Shannon Puls, who runs researcher EarningsWhispers.com in Jackson, Mo., says that even if earnings reports are upbeat, investors should think twice before jumping into the market. His reason: Wall Street analysts are saying to do it with both feet.

The problem, Puls says, is that analysts shy away from “gutsy calls” because if they’re wrong, clients could lose money and analysts will lose their jobs. So, Puls says, they predict in packs, often proving a “contrarian indicator.”

In other words, don’t do what they say. Do the opposite.

Puls says that analysts are now more optimistic than ever, and that means stocks could fall. He ranks analyst recommendations on more than 3,000 companies on a sliding scale, with 1 representing a strong “buy” and 5 a strong “sell.” The average call now: 2.07. That’s the lowest, or most bullish, in the nine years he’s been tallying the numbers.

Analyst ratings “have got to come down,” Puls says. “And that’s going to be bearish on stocks.”

Another reason for investors to exercise caution is all the corporate cash lying around in banks vaults, earning little. Companies worried about the future hoard money, just as people do. In March, cash at S&P 500 companies hit a record $837 billion. That’s equivalent to 1 1/2 years of their operating earnings.

The cash hoard of as June 30 won’t be known until mid-August, and it’s anyone’s guess what the level will be. But S&P’s Silverblatt is willing to predict this: It’ll hit a new record.