NEW YORK – U.S. stock investors will look closely at the Federal Reserve (search) comments next week for clues on whether the central bank thinks the economy is losing steam or chugging along at a decent clip.
Wall Street expects the Fed to raise the fed funds rate another 25 basis points to 3.25 percent in the week ahead. But investors will be looking for signs of whether this rate hike is the last — or next to last — for some time.
Recent gains in the market have been fueled by the expectation that the Fed may put further interest-rate hikes temporarily on the back burner if the economy slows. So any indication from the Fed's rate-setting arm on the pace of future hikes will be intensely scrutinized.
Some consumer data and end-of-the-month portfolio tweaking may help pick up the market.
But nervous investors will mostly be tuning in to a few choice words from the Federal Open Market Committee (search) meeting on Wednesday and Thursday.
Investors will "really be paying attention to see whether or not the Fed is getting nervous about economic growth," said Anthony Chan, managing director and senior economist at JPMorgan Asset Management, on Friday.
In the past week, major stock indexes posted the worst weekly percentage declines since mid-April. The Dow Jones industrial average dropped 3.06 percent, the Standard & Poor's fell 2.09 percent and Nasdaq (search) declined 1.76 percent as the price of crude oil touched a record $60 a barrel, and transport stocks slid.
Waiting on the FOMC
The FOMC is expected to announce a rate increase, as well as issue its statement on monetary policy and the U.S. economy, on Thursday as the meeting ends at about 2:15 p.m. EDT.
This would be the ninth consecutive rate increase over the past year. Each time, the Fed has raised borrowing costs by a quarter percentage point, or 25 basis points.
In May, the Fed raised its target for the federal funds rate to 3 percent from 2.75 percent.
From Wall Street to Main Street, investors will note the Fed's views on inflation and economic growth — and whether it keeps the word "measured" — Fed code for raising rates a quarter-point at a time — in its credit-tightening arsenal.
"They're not trying to fight inflation. They're trying to get the housing market to cool down," said Elliot Spar, a market strategist with Ryan Beck & Co.
On Friday, the Commerce Department said new home sales rose 2.1 percent in May, above expectations, but sales for the three previous months were revised lower.
Yet U.S. durable goods orders, excluding civilian aircraft and defense, showed unexpected weakness last month. That raised some questions about the economy's health, in spite of strong new home sales.
Spar expects the Fed to continue raising the federal funds rate past 3.5 percent. If he's right, that would extend the Fed's current cycle of raising rates to at least this fall.
U.S. interest-rate futures, though, showed the market expects the Fed to raise rates this week and again in August — but beyond that, it's open to debate. The FOMC calendar calls for meetings on Aug. 9, Sept. 20, Nov. 1 and Dec. 13.
The Conference Board's consumer confidence index, due on Tuesday, may give investors a hint about whether consumers are inclined toward spending more — or less. It also could provide a sense of how monthly retail sales will fare.
May personal income and spending data as well as the Chicago Purchasing Managers' Index, set for release on Thursday, may shed some more light on the pace of economic growth.
Just a handful of companies will be reporting earnings, but monthly sales reports from major automakers, and results from non-cyclical companies like Walgreen Co. (WAG) and General Mills Inc. may help give the market a more positive tone. Quarterly earnings from Nike Inc. (NKE) and Oracle Corp. (ORCL) are also on deck for next week.
June auto sales may lift the market next Friday, as General Motors Corp.'s "employee discounts for everyone" marketing scheme is expected to boost sales figures.
"Incentives got a lot more attractive and auto sales have proven in the past that they are incentive-driven," Chan said.
Playing 'Dress Up'
As the quarter comes to a close, some institutional investors may start to gussy up their portfolios by buying more shares of companies they already own or selling off underperforming stocks. Analysts say portfolio tweaking could either help or hurt the stock market next week.
"Will it be window dressing on the upside or an undressing on the down side?" asked Jeffrey Saut, chief investment strategist with Raymond James & Associates.
"It's kind of a coin toss because you're coming to the end of the quarter," he added. "If somebody put a gun to my head, I would say that you've seen the highs for this move."