Wall Street is still on course to end 2006 in the plus column, but it's too early to pop the champagne corks. Investors will comb through next week's jobs report for November and other data to see if the U.S. economy and corporate profits will be able to withstand the fallout from a slowdown in housing and the dollar's slide.
In the past week, unexpected declines in two closely watched indexes -- one of Midwestern business activity and the other of U.S. manufacturing -- bolstered hopes that the Federal Reserve may want to forestall an acute economic slowdown by cutting interest rates sometime soon.
Just how soon is the question. Investors hope that the answer might lie in next week's stream of numbers.
"I expect trading next week to be subdued, with generally a cautious tone," said Frederic Dickson, senior vice president and market strategist at D.A. Davidson & Co., in Lake Oswego, Oregon. "Investors are going to be on alert, waiting for Friday's jobs report."
Economists polled by Reuters expect U.S. nonfarm payrolls to add 110,000 jobs in November, after October's gain of 92,000. They're forecasting an increase in the U.S. unemployment rate to 4.5% in November from 4.4% in October.
But if November payroll growth falls below 100,000, investors could become more concerned about the economy's health, analysts said.
That anxiety, though, is not likely to derail the stock market's momentum toward a higher finish for the year.
"The jobs report will be key because people will be looking for further evidence the economy is weakening and that would add more fuel to the fire that a rate cut is something that would happen sooner rather than later," said Sam Rahman, portfolio manager at Baring Asset Management Inc. in Boston.
ICY WIND FROM ISM
U.S. interest-rate futures on Friday indicated that markets were pricing in a 64% chance of a rate cut in the first quarter of 2007.
Those odds were up from 52% factored in before the
Institute for Supply Management reported that its index of national factory activity fell below 50 in November for the first time in 3-1/2 years, undercutting forecasts for a tiny gain.
"Going into next week, a number of traders will have fresh memories of the latest ISM index," said Dickson of D.A. Davidson & Co.
But "its effect seems to be offset by the fact that there are still very strong year-end contributions as hedge fund managers look to catch up with their performance benchmarks before year-end," he explained.
Still, the drop in the ISM's manufacturing gauge proved stunning enough to send major U.S. stock indexes into the red on Friday, the first trading day of December. Comments from a Federal Reserve official saying more interest-rate hikes may be required to curb menacing inflation added to the downside bias.
For the week, the Dow Jones industrial average ended down 0.70%, while the Nasdaq dropped 1.91 percent. The S&P 500 finished off 0.30%.
SANTA MAY BE LATE
But with only four weeks to go in the year, the Dow is up 13.78 percent for 2006 so far, while the S&P 500 is up 11.89% and the Nasdaq is up 9.43%.
Although the barrage of economic data could cause some apprehension, analysts say it's likely that the stock market will add to its gains as investors begin positioning themselves for the new year and a possible cut in interest rates.
"The main thing that Wall Street is looking for from the economic numbers is what the impact on earnings is going to be and what the impact on demand is going to be," said Christopher Zook, chairman and chief investment officer at CAZ Investments in Houston, Texas.
"The Santa Claus rally could come around the last week of Christmas. It's much more liquidity driven, with the amount of money coming in at the end of the year."
TUNING IN TO TOLL BROTHERS
In the coming week, Monday's release of October pending home sales figures will merit attention. Economists polled by Reuters forecast that the National Association of Realtors pending home sales index will drop to 108.6 in October from 109.1 in September.
Among notable companies with earnings to report is luxury home builder Toll Brothers. It's scheduled to report on Tuesday. Wall Street will zero in on what the company says about its outlook.
Investors also will focus on the revision of third-quarter productivity and unit labor costs on Tuesday, along with the release of October factory orders.
Besides the jobs report on Friday, the University of Michigan will release its preliminary reading of December consumer sentiment. The Reuters forecast: 92.0, compared with November's final index at 92.1.
Crude oil prices could prove to be another wild card for the stock market after ending November back above $60 a barrel with their first monthly gain since July and their biggest monthly advance since April.
Investors also will keep an eye on the dollar after the greenback slumped on Friday to a 14-year low against the British pound and a 20-month low against the euro following the surprisingly weak ISM manufacturing data.
A more precipitous slide in the dollar, analysts say, could fuel inflationary pressures by causing the prices of imported goods to surge. But that scenario would benefit the earnings of multinationals such as Caterpillar and Coca-Cola.