NEW YORK – U.S. stocks are poised for a rally next week as lower crude prices fuel investors' optimism that businesses and consumers will get a break from high energy costs and have more cash to spend this holiday season.
With the quarterly earnings period almost over, investors will have more time to sift through a raft of economic data next week. Those numbers could help set the market's tone.
But the price of oil appears to have the most sway over the market's direction.
This past week, crude extended its slide below $60 a barrel to the lowest levels since late July. The government reported a surprising increase in U.S. oil inventories in the latest week, while unseasonably warm weather enveloped the U.S. Northeast, the biggest energy-consuming region in the United States.
"As long the weather stays warm, the heating bills will stay down, so next week the market should resume a little bit of the upside after some consolidation this week," said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co.
So far this month, stocks have advanced after a dreary October, thanks in part to growing expectations for a year-end rally. Market strategists said these perceptions could lure investors away from valuation-rich sectors like energy into undervalued sectors like technology.
At Friday's close, stocks scored their third straight week of gains. The Dow Jones industrial average and the Nasdaq Composite Index both climbed 1.5 percent, while the Standard & Poor's 500 Index rose 1.2 percent.
The Fed's Point of View
When the Fed talks, Wall Street listens. The coming week features a heavy roster of speeches from Fed officials, including Chairman Alan Greenspan on Monday via video conference at a Bank of Mexico event.
On Tuesday, Michael Moskow, president of the Federal Reserve Bank of Chicago, will speak to Chicago business leaders about the economic outlook. The same day, Richard Fisher, president of the Dallas Fed, will tell a Dallas forum about the impact of globalization on the Fed's decision making.
On Wednesday, Philadelphia Fed Bank President Anthony Santomero will speak in New York.
On Thursday, St. Louis Fed Bank President William Poole will talk about tracking inflation. The same day, Sandra Pianalto, president of the Federal Reserve Bank of Cleveland, and the Chicago Fed's Moskow will speak at a conference sponsored by the Cleveland Fed.
Investors will keep an eye out next week for any signs of inflation. The government is set to release the U.S. Producer Price Index on Tuesday, and the U.S. Consumer Price Index on Wednesday. Both reports are for October.
Economists polled by Reuters expect the core PPI, excluding more volatile food and energy items, rose 0.2 percent in October, after a 0.3 percent gain in September. They forecast that core CPI went up 0.2 percent in October, after a 0.1 percent gain in the previous month.
"The numbers are hopefully going to give investors a sign that the Fed may slow interest-rate hikes," said Andre Bakhos, president of Princeton Financial Group.
Housing Starts and Holiday Hopes
Investors will pay close attention to a reading on the state of the U.S. housing market, a key driver of the economy's growth, after luxury home builder Toll Brothers Inc. cut its fiscal 2006 profit outlook this past week. The warning from Toll Brothers sparked concerns about a possible slowdown in the housing sector.
The October housing starts report is due on Thursday.
Market strategists said the housing data would be scrutinized as its release will follow quarterly earnings from home improvement chains Lowe's Cos. (LOW) on Monday and its bigger rival Home Depot Inc. (HD), a Dow component, on Tuesday. They are among the companies whose fortunes are closely tied to the U.S. housing market.
"You've got a situation where if we have this housing sector slowdown and there's some sort of slowdown in the retailers, the place where it's first going to start to show up is in those 'big box' Home Depot-type companies," said Christopher Johnson, director of quantitative analysis at Schaeffer's Investment Research in Cincinnati.
Wal-Mart Stores Inc. (WMT) is scheduled to report its quarterly earnings on Monday. But investors probably will concentrate more on what the world's largest retailer says about the prospects for the year-end holiday shopping season.
"Investors will be paying lots of attention to what companies have to say about what they're seeing, in terms of what their plans might be to try to capture the incremental dollar through the holiday season," said Jack Caffrey, equity strategist at JP Morgan Private Bank, which oversees $280 billion in assets.