Investors Watch for Interest-Rate Increases

U.S. stocks could make modest gains next week if the Federal Reserve raises interest rates as anticipated, while major indexes continue to flirt with 5-year highs.

Investors also will receive more data on the closely watched housing market when No. 3 U.S. home builder Lennar Corp. posts its quarterly results Tuesday.

Investors pushed stocks higher Friday after a surprisingly sharp drop in new U.S. home sales in February suggested the Federal Reserve may stop raising rates sooner than expected. Shares of home builders, however, initially fell on the news before recovering later in the day.

The weaker home sales report confirmed "what the leading indicators have been saying, that housing's been cooling," said Jeff Schappe, chief investment officer of BB&T Asset Management in Raleigh, North Carolina.

"To the extent that it signals the economy is slowing down, the market's going to say the Fed's going to stop tightening and that would be positive" for stocks, he added.

Shares of retailers in the consumer discretionary sector, such as restaurants or department stores, would not be likely to thrive in a slower economy, but consumer staples could benefit on a relative basis, in Schappe's opinion.

"With the economy cooling, people may be more focused on value," he said. "It's good for Wal-Mart , whereas going out to eat or buying a high-priced article of clothing may cool down. But the equity market as a whole would benefit from the Fed taking its foot off the brake."

Debut of a Fed Chairman

The fact that new Federal Reserve Chairman Ben Bernanke will be leading his first rate-setting Federal Open Market Committee meeting next Monday and Tuesday will increase Wall Street's focus on the policy-makers' gathering — though an outcome of another 25-basis-point increase in the federal funds rate target is widely anticipated.

It would be the Fed's 15th consecutive rate increase since it began tightening credit on June 30, 2004.

"Anything other than an increase of 25 basis points would be extremely surprising," said David Chalupnik, the head of equities at U.S. Bancorp Asset Management. "There is a little more anxiety because it is Bernanke on board here."

Chalupnik sees rangebound stock trading in the week ahead with small gains possible once the rate-setting meeting ends and related uncertainty is cleared out of the way.

For the week, the Dow Jones industrial average finished flat, while the Standard & Poor's 500 Index slipped 0.3 percent, and the Nasdaq Composite Index gained 0.3 percent.

Interest-rate futures markets are increasingly forecasting that the Fed will raise official short-term interest rates by a quarter-point at its policy meeting next Tuesday and just one more time after that before halting its nearly two-year campaign of "measured" quarter-point hikes.

Two more rate hikes would lift the federal funds rate that banks charge one another for overnight loans to 5.00 percent from 4.50 percent currently.

Taking the Economy's Pulse

Stock market participants generally think uncertainty will weigh on the market until the Fed has finally completed the current cycle of rate increases.

"Down the road, economic indicators are going to show slowing growth," Schappe said.

"The Fed's going to maintain a posture of tightening until they see a number of months of slower GDP growth," he added. "There will be some turbulence in the near term, but ultimately, the Fed will adopt a 'neutral' bias and that will be positive for the stock market."

A final look at fourth-quarter gross domestic product, due Thursday, will be among the coming week's most closely watched economic reports. Economists polled by Reuters expect that fourth-quarter GDP grew at an annual rate of 1.7 percent, instead of the previously reported 1.6 percent.

The consumer confidence index for March will be released Tuesday by the Conference Board, a private research group in New York. It's seen rising to 102.0 in March from 101.7 in February, according to the Reuters poll.

On Friday, the economic calendar will be full: February personal income and spending; the University of Michigan's final March reading on consumer sentiment; the Chicago Purchasing Managers' Index, known as the Chicago PMI, for March, and February U.S. factory orders.

Looking for Turnaround Stories

Carter Worth, chief market technician at Oppenheimer & Co. in New York, said he will be watching shares of airlines, railroads and real estate investment trusts, which he thinks are "way overdone."

The Dow Jones Transportation Average hit a lifetime high this week, while the Morgan Stanley Capital Index of U.S. REITs reached a record high on March 17.

But some recent dogs could see a turnaround.

"Wal-Mart is starting to stabilize. DuPont, Family Dollar, Zebra Technology, Petco, are all looking poised for bearish to bullish reversals. Paper stocks, too, International Paper and Abitibi-Consolidated, they've definitely been weaker and have not participated, but they are coming to life and we would play them for further life. They're going perk up."

Besides home builder Lennar, companies expected to report earnings next week include drugstore company Walgreen Co., payroll processor Paychex Inc., jewelry retailer Tiffany & Co. and consumer electronics retailer Best Buy Co. Inc.