NEW YORK – Stocks could rally back up to their highs of the year next week if the Federal Reserve shows Wall Street that its decision to keep interest rates on hold last month wasn't just a one-off.
Stocks have been on a steady climb since mid-August, following the Fed's first pause after 17 straight interest- rate increases. The tightening cycle had stretched out over a two-year span that began in June 2004. The Fed will announce its latest monetary-policy decision Wednesday,
"We'll probably hear more of the same, that they want to give the 17 increases more time to filter through the economy and that they don't want to stop the growth," said Richard Sichel, chief investment officer at Philadelphia Trust Co. "That would generally be considered a positive, so we can stop worrying about what the Fed is thinking and focus more on corporate earnings."
For the week, the Dow gained 1.5 percent, while the Standard & Poor's 500 Index rose 1.6 percent, and the Nasdaq climbed 3.2 percent.
Much of the advance in stocks over the past week coincided with a seven-day slide in oil, with crude futures touching their lowest price since March. But the stock market's gains could just as easily evaporate if the price of oil rebounds.
"Oil's moved too fast, too soon, we're due for a bounceback," said Michael Metz, chief investment strategist at Oppenheimer & Co. Inc. in New York. "The oil companies themselves have been beaten down enough and they are positioned to rally."
OIL DOWN 4 PERCENT THIS WEEK
If, however, oil prices stay put, stocks may still be able to reach new highs for the year. With heating fuel supplies seemingly adequate, sentiment in the oil market is bearish.
"It's perceived as positive for the market and oil for it to stabilize in the low $60s," Sichel said.
On Friday, U.S. crude oil for October delivery settled at $63.33 a barrel, up 11 cents for the day on the New York Mercantile Exchange.
For the week, the price of NYMEX October crude fell $2.92, or 4.4 percent. U.S. crude oil futures prices are down $15.07 — or 19.2 percent — from the record of $78.40 a barrel, reached on July 14.
The drop in crude was a major contributor to a wave of sector rotation under way in the stock market, with energy shares, last year's top performers, falling to the bottom rank for the week. Meanwhile, consumer discretionary, one of the worst performers for much of this year, performed best this past week.
"There has clearly been some rotation. More defensive sectors have been outperforming telecom and consumer is acting reasonably well and you are starting to see more tech is acting better," said Tim Woolston, portfolio manager at Boston Advisors Inc. in Boston.
Another interest-rate pause from the Fed, along with comments that the economy's growth is moderating, could whet investors' newfound appetite for defensive sectors even more, Woolston said.
FEDEX EARNINGS EN ROUTE
Next week, earnings pre-announcements may start to trickle in. Several key companies will report their quarterly results, including package delivery service FedEx Corp. (FDX) on Thursday.
"FedEx really has its pulse on the pace of business activity," Metz said. "People will look to management's comments to see how they view the economy and also their guidance for the rest of the year."
Several consumer-oriented companies are also set to report results, including Red Lobster chain operator Darden Restaurants Inc. (DRI) on Tuesday, housewares retailer Bed Bath & Beyond Inc. (BBBY) and electronics chain Circuit City Stores Inc. (CC) on Wednesday, followed by food producers ConAgra Foods Inc. (CAG) and General Mills Inc. (GIS), and athletic wear maker Nike Inc. (NKE), all on Thursday.
Other earnings on tap for the week include software maker Oracle Corp. (ORCL) and auto parts retailer AutoZone Inc. (AZO) on Tuesday, investment bank Morgan Stanley (MS) , uniform maker Cintas Corp. (CTAS) and orthopedic device maker Biomet Inc. (BMET) on Wednesday, and cruise line operator Carnival Corp. (CCL) on Thursday.
KB Home is set to report earnings on Friday. But like many in the beleaguered sector, the home builder already cut its forecast last week, saying fiscal third-quarter orders fell 43 percent.
HOUSING STARTS AND PPI
The week's major economic indicators will come Tuesday before Wall Street's opening bell, with the release of the August report on the U.S. Producer Price Index, as well August housing starts and building permits. The data will be released at 8:30 a.m. EDT .
Economists surveyed by Reuters have forecast that U.S. housing starts slowed to an annual pace of 1.750 million units in August from a rate of 1.795 million units in July. They see building permits easing to an annualized rate of 1.745 million units from July's pace of 1.763 million units.
The Producer Price Index, a report on wholesale prices, is expected to rise 0.2 percent in August, according to the Reuters poll, after a gain of 0.1 percent in July. Core PPI, which excludes volatile food and energy costs, also is forecast to gain 0.2 percent in August, after July's decline of 0.3 percent.