The stock market has the wind at its back going into next week.
But investors are counting on the Fed to keep that momentum going. Stock traders expect a 0.25% cut to the Fed funds target rate and a possible discount rate cut when the Fed issues its statement Wednesday. There are also those holding out hope that the Fed will deliver another 0.50% cut to unjam the still ailing part of the credit markets and take the pressure off of weak housing.
Some significant data and major earnings reports are also in the mix. Plus the trend of rising oil and a shrinking dollar is in place, as is a persistent move to quality in the credit markets.
Third quarter GDP is released Wednesday morning while the Fed is still conducting its two day rate meeting. On Friday, important October jobs data is issued and as we saw in August and September, that data can be highly market moving.
"If the Fed cuts 25 (a quarter point), where expectations are centered, I think you get a modest rally in equities and credit. That also depends on what kind of language the Fed provides us," said Edward Marrinan, chief credit strategist at J.P. Morgan. "There's some wild card elements for that announcement that we can't really judge."
The stock market got some legs under it Friday, after credit worries and negative volatility subsided. Stocks were swept higher on a big earnings-inspired rally in Microsoft and the comfort of a surprisingly positive forecast from troubled mortgage broker Countrywide. The beaten down financial sector ended Friday's session with a 2.5% gain and tech bounded 2.4% higher.
For the week, the Dow rose 2.1% or 284 points, its biggest weekly gain since September 21. On Friday, it rose 1%. Year-to-date, the Dow is up 11%. The Nasdaq was up 2.9% for the week or 79 points in its biggest weekly point gain since August 18. The Nasdaq is up 16% for the year so far. The S&P 500 rose 2.3% for the week, a gain of 35 points. Year-to-date, it is up 8.2%.
Best performing S&P sectors for the week were utilities, up 4.76%; materials, up 3.64%; then tech, up 3.28%. Financials was next with a move up of 2.71%. Worst performers were telecom, up 0.74% and industrials, up 1.35%.
The dollar fell 0.3 against the yen in the last week and 0.6% against the dollar. For the year, the dollar is off 8.3% against the euro.
Why so Resilient?
That's a question a lot of investors have been asking about the stock market, particularly as they watch oil climb higher and higher. We also hear it at times when the credit markets are particularly cranky, like they were at times this past week.
Citigroup's chief stock market strategist Tobias Levkovich says there are fundamental reasons behind the stock market's strength, but also investors have a different mind set.
"The equities market never got the frothiness the debt markets got. Never even came close. If you want to think about risk tolerance on steroids, think about early 2000 for equities," said Levkovich. "We certainly never got to that type of enthusiasm for stocks in that last round."
He said earnings increased faster than stock prices and stock investors have a different attitude. "In 2000, it was anything is possible. In the last few years, it's everything's challenging," he said.
Levkovich said stock investors who were in builders and banks were in the "epicenter" of the market's turmoil but other parts of the market (and economy) continue to perform. He has a target of 1600 on the S&P by year-end and 1675 by the end of 2008. He expects the S&P to hit 1725 around the middle of next year before backing down.
Among the stocks Citi likes are diversified financials like asset managers. "Technology is an area we liked and continue to like," he said.
Oil cracked $92 a barrel on the NYMEX and closed at a record $91.86, a gain of $4.91 or 5.65% for the week. Gasoline rose 2.9% for the week to $2.2740 per gallon, and heating oil rose 4.4% to $2.4325 per gallon. Natural gas was up 2.5% to $7.218 per million BTUs.
I asked Levkovich why oil isn't hurting stocks. "We've had a steady increase in oil prices, not an overnight tripling. That's just structurally different" than the Arab oil embargo, for instance, he said.
Energy costs for businesses are also about 7% of costs, not so bad if the other costs aren't going up in a meaningful way. So for now, the economy is able to absorb the gradually rising prices and is adjusting to them. Citi recommends being overweight energy stocks but put energy on downgrade watch a month ago. "It's getting less compelling to us" Levkovich said.
Besides the Fed's meeting, there is a big batch of important data in the week ahead. In addition to GDP, Wednesday's reports include the employment cost index, construction spending, Chicago purchasing managers and ADP's employment report, a kind of sneak peek at monthly data. On Thursday, jobless claims, personal income, consumption spending , pending home sales and ISM manufacturing data. Auto makers report their monthly car sales that day as well.
Friday's jobs data is the big number. The consensus is for 80,000 non farm payrolls, compared to September's 110,000, and an unemployment rate of 4.7%. September factory orders are also reported that day. (Get More Economic News here)
Expect another barrage of earnings reports this week. Ninety-five of the S&P 500 report, and we'll get news from some financials, energy, airlines, and consumer products companies. Several of the Dow 30 report -- Verizon is on Monday, Procter and Gamble reports Tuesday and ExxonMobil is Thursday.
On Monday, Kellogg, Ashland Oil, Humana and Northwest Airlines report. Colgate-Palmolive, Avon Products, UBS, Liz Claiborne, Goodyear and McKesson report Tuesday. On Wednesday, Kraft, Clorox, Hess, Newmont Mining and Weyerhauser report, as do Barrick Gold, Prudential and Sunoco.
Thursday's earnings news comes from Eastman Kodak, Marathon Oil, Blockbuster, AstraZeneca, Mack-Cali Realty, Williams Cos., CBS and PG&E. On Friday, Cigna, Duke Energy, NYSE Euronext, Martha Stewart Omnimedia and EDS report.
Pumped Up Oil
Oil is likely to keep rising towards that big round $100 mark in the week ahead.
MF Global senior vice president John Kilduff says there's a lot of momentum behind the rise. He says there are a lot of speculative buyers running long into the market.
"The Federal Reserve rate decision next week is also going to be a catalyst. If they go 50, I would expect to see the dollar go lower and oil would go higher...If they don't cut, they'll think the economy is ok ...but will struggle with energy demand growth. No matter what the Fed does next week, it will be a catalyst for higher oil prices," said Kilduff, a CNBC contributor.
Distilled products - heating oil and gasoline - could start to rise even faster than they have been.
"As we start to see the tanks get filled up for the winter, consumers are going to start to see heating oil prices as much as 30 to 50 percent higher than they were last year. Natural gas consumers are only going to start looking at a 10 percent increase. They're the lucky ones this year, and of course consumers are in the process of seeing at least 20 to 30 cents higher at the pump in coming weeks," he said. "I think that gasoline is rebounding and is as cheap as it will be relative to crude. As crude goes up, gasoline will go up."
Geopolitical tensions also continue to affect the market. One of the stories oil traders watched in the past week was the U.S. announcement of sanctions against Iran. See CNBC's Larry Kudlow's interview with Vice president Dick Cheney where he discussed sanctions against Iran though said he would not forecast whether the U.S. would put sanctions on oil exports.
Around the World
Russian President Putin continues to toss out cold war-isms. Friday he compared the U.S. plan for a missile shield in Europe to the Cuban missile crisis of 1962. Putin also got into a tussle with European Union leaders in Portugal over EU plans to limit foreign investment in its energy markets.
The EU has made proposals that would hamper Russian Gazprom's ability to buy up power grids and pipelines in Europe.
Cambridge Energy Research Chairman Dan Yergin just got back from Moscow where he was attending the U.S. Russia Business Council annual meeting. Yergin, CNBC's global energy analyst, said the prosperity that comes with oil wealth is in evidence.
"Russia's 7 percent economic growth for seven years has made Moscow a boom town," he said. "There's an economic basis to Putin's high popularity and to the confidence you see there now, and he's doing a sort of text book job of how not to be a lame duck."
Big Banks in Focus
Stocks of Wall Street investment banks and brokers will be in the spotlight as investors react to the departure of Merrill Lynch CEO Stan O'Neal. O'Neal is the highest profile casualty to date in the credit market's debacle.
The question now is whether Merrill's new leadership can quell fighting within the ranks and deal with restoring the firm's reputation as they uncover any further credit related issues.