NEW YORK – Look for U.S. stocks to trade slightly higher next week as Wall Street cheers improving corporate profits, recent military successes in Afghanistan and growing optimism for an economic recovery next year.
Better-than-expected earnings from tech bellwethers such as Hewlett-Packard Co. have helped brighten the outlook for the battered sector.
Investors have also taken heart from surging retail sales data that shows consumers are flocking to stores — and buying.
"The market has an upward bias to it," said Edward Hemmelgarn, president of Shaker Investments, which oversees $2 billion in Cleveland, Ohio. "Companies aren't missing their numbers anymore. The news isn't getting any worse and, in fact, it's actually starting to improve."
Still, traders expect volatility caused by light volume as portfolio managers and other investors head out of town for the Thanksgiving holiday, which will be observed on Thursday, Nov. 22. The stock market will be closed on Thursday and will shut down early at 1 p.m. EST on Friday.
Just 3.48 billion shares changed hands on the New York Stock Exchange during Thanksgiving week last year, compared with 6.26 billion traded on the week ended Nov. 9.
"We're going into a light volume week and a lot of participants will be out, so the potential for volatility is there," said John O'Donoghue, co-head of listed stock trading for Credit Suisse First Boston.
'Soft Wear' and Hardware Earnings
A slew of retailers will report quarterly results, including the nation's No. 2 home-improvement retail chain, Lowe's Cos. Inc., and Intimate Brands Inc., which operates the Victoria's Secret lingerie chain.
Investors say they will look for signs revenues and profits are on track to improve next year.
Some are betting that signal will come and they have been loading up on retail stocks in advance.
"We're focusing on the consumer discretional companies, such as Home Depot Inc. and Best Buy Co. because they're companies that benefit from an improvement in the economy," said Joseph Stocke, who helps manage $1 billion for StoneRidge Investment Partners.
Lowe's, which ranks second only to Home Depot, is expected to report earnings on Monday, while Intimate Brands' results are anticipated on Tuesday. Toys R Us Inc., the nation's largest toy-store chain, is also expected to report earnings on Monday.
Economic data will be light next week. On tap: October's housing starts and weekly jobless claims. Also expected next week is a monthly semiconductor equipment industry report, which may strengthen hopes a bottom has been reached in the chip-making industry's worst downturn in decades.
An Upbeat Week, More Gains to Come
Stocks closed the week higher after retail sales data and some strong profit reports boosted hopes the U.S. economy is on track to rebound by the middle of next year.
The broad Standard & Poor's 500 index rose 1.6 percent for the week, while the tech-laden Nasdaq composite index gained 3.8 percent. The blue-chip Dow Jones industrial average finished the week up 2.7 percent.
On Wednesday, the Commerce Department said total retail sales zoomed ahead by 7.1 percent in October as consumers took advantage of cheap financing to buy new cars. That was the strongest one-month gain since records were started in the late 1960s.
Also boosting optimism was Hewlett-Packard's profit results, which trounced Wall Street forecasts after tough cost cutting. Advances in the U.S.-led war in Afghanistan also helped. On Friday, U.S. officials said a chief lieutenant of fugitive Osama bin Laden is believed to have been killed in a U.S. airstrike.
Bin Laden is widely believed to have helped mastermind and support the Sept. 11 attacks on the United States.
This week's advance was part of a broader trend, which some investors say will continue in the short term.
The S&P 500 and Nasdaq have chalked up gains six of the past eight weeks, and the Nasdaq is up more than 30 percent since Sept. 21, the week following attacks on the World Trade Center and the Pentagon.
"I see us moving sideways with a slight upwards drift," Stocke said. "Investors are looking ahead to an economic recovery taking place by the middle of the year."
What is behind such optimism?
On Nov. 6, the U.S. Federal Reserve cut the federal funds rate, the rate charged on overnight bank loans, to 2.0 percent, its lowest level since 1961. The Fed also slashed the discount rate, the rate it charges on emergency bank loans, to 1.5 percent. That aggressive easing in monetary policy was the Fed's 10th interest-rate cut this year. The two-year Treasury note now offers barely 3 percent in returns in the secondary market, making stocks more attractive.
Effect of Bad Data vs. Bin Laden
Even so, some strategists are wary.
Douglas Cliggott, the chief portfolio strategist for J.P. Morgan, has cut his 2002 earnings-per-share outlook for companies in the S&P 500 to $36 from $38, on expectations business spending will be below its year-earlier level at the end of next year. Cliggott said he believes the S&P 500 could tumble below the Sept. 21 levels, their 2001 lows, in the next year.
Wall Street pros caution the economic outlook is likely to get worse before it gets better. The U.S. economy shrank at a 0.4 percent annual rate in the third quarter and is expected to keep contracting in the current fourth quarter.
Stocke and other investors say the market is still skittish over the possibility of more attacks on U.S. soil. If attacks occur, it could undermine already shaky consumer confidence and cause spending to slow — hurting corporate profits, they say.
But most traders agree there is one catalyst that could send stocks sharply higher in the short term: The capture of bin Laden.
"You'll get a couple-hundred-point rally as guys say 'Yahoo! We've caught this guy. All is well with the world,'" O'Donoghue said.