Investors Think the Markets Will Bring a Week of Holiday Cheer

With Wall Street in the year's final stretch and the Dow in record territory, investors believe this week will bring even more holiday cheer.

But before any wild celebrations can begin, investors will hear from two key Federal Reserve officials on the state of the U.S. economy and wade through a slew of economic reports, including the November Producer Price Index.

The final reading on third-quarter gross domestic product,

November housing starts and the core personal consumption expenditures (core PCE) price index — the Fed's preferred measure of inflation — are also on tap.

After Friday's mild reading on the Consumer Price Index, investors will heed the PPI report and the core PCE price index. These numbers may help investors adjust expectations of when the Fed may start cutting interest rates.

"PPI may play a role, but the big number next week is probably going to be the PCE number that's coming out on Friday," said Joe Liro, economist and strategist at Stone & McCarthy Research Associates in Princeton, New Jersey.

"The PCE number," he added, "will give us an idea of just how strong the fourth quarter was in terms of real growth and" it will give "a good idea of what (the) inflation numbers are. There should be good news on both."

MERGERS ON THEIR MINDS

Moreover, if this week opens with yet another "Merger Monday," Santa could turn out to be even more generous to the stock market, analysts said.

Gains generated in the market's penultimate week will put stocks firmly on track for their biggest finish in two years.

On Friday, the Dow ended at a record 12,445.52 — its 20th record close since the start of October — and finished the week up 1.1 percent, its second straight weekly gain. Earlier Friday, the Dow hit an intraday record of 12,486.30.

The S&P 500 closed Friday at 1,427.09, after earlier reaching a six-year high at 1,431.63. For the week, the S&P 500 was up 1.2 percent. The Nasdaq finished Friday's session at 2,457.20, after hitting an intraday peak at 2,470.02, its highest since February 2001. For the week, the Nasdaq gained 0.8 percent.

With just two weeks left in the year, the Dow is up 16.1 percent for 2006 so far, while the S&P 500 is up 14.3 percent and the Nasdaq is up 11.4 percent.

"I would guess we have some merger news on Monday as people try to get deals in before the end of the year," said Christopher Zook, chairman and chief investment officer at CAZ Investments in Houston, Texas.

Wall Street's rush to do as many deals as possible could coincide with a last-minute push by some fund managers to snag the market's winning stocks for their portfolios before they pull the curtain on 2006, analysts added.

Last week, forecast-beating earnings from a range of companies, including investment banks Goldman Sachs (GS), Bear Stearns Cos. Inc. (BSC) and Lehman Brothers Holdings (LEH) plus warehouse club retailer Costco Wholesale Corp. (COST), helped the Dow resume its record-setting streak after a month's hiatus.

DREAMING OF A SOFT LANDING

Even so, this week's Fed speakers may give some hints about what's likely to guide the Fed's approach on future interest-rate policy.

Last Tuesday, the Federal Open Market Committee left the benchmark fed funds rate target unchanged at 5.25 percent for the fourth straight time. In August, the FOMC paused after raising rates for 17 times stretching back to June 2004.

Federal Reserve Bank of Dallas President Richard Fisher is scheduled Tuesday to give a speech entitled "A Year-End Wrapup of the Economy" in Longview, Texas.

Thursday, Federal Reserve Bank of Richmond President Jeffrey Lacker will speak on the economic outlook before the Charlotte Chamber of Commerce in North Carolina.

"The market continues to believe that the Fed has engineered this soft landing they were hoping to get," said Ernie Ankrim, chief investment strategist for Russell Investment Group in Tacoma, Washington.

"There's a recognition that the Fed is done increasing rates," he added.

PPI, HOUSING STARTS AND PCE

This week's economic calendar has at least one set of numbers worth noting on every single day. On Monday, the National Association of Home Builders will release its December index. Third-quarter U.S. current account deficit figures also are due on that day.

Tuesday's agenda calls for November PPI and housing starts. Economists polled by Reuters expect the core Producer Price Index, excluding volatile food and energy prices, to have grown 0.2 percent in November, after falling 0.9 percent in October. Headline PPI is seen up 0.5 percent in November following a 1.6 percent drop in October.

Last week, U.S. crude oil for January delivery settled on Friday at $63.43 a barrel, up 1.5 percent.

November housing starts are forecast to have risen to an annualized rate of 1.530 million units from October's 1.486 million units, the Reuters poll showed.

Wednesday, it's weekly mortgage and refinancing numbers.

Thursday is GDP day. Economists polled by Reuters believe that third-quarter gross domestic product grew at an annual rate of 2.2 percent, matching the previously reported figure.

On Friday, the University of Michigan's December consumer sentiment index, due Friday, is pegged at a final reading of 90.2, down from November's 92.1.

The core personal consumption expenditures price index, also known as the core PCE price index, is due on Friday, as part of the November report on personal income and spending. The core PCE price index, excluding food and energy prices, is seen up 0.2 percent in November, matching its October gain.

Personal income for November is forecast up 0.4 percent, matching October's gain, while personal consumption is seen up 0.6 percent, after October's 0.2 percent gain.

Last but not least on Friday will be November's U.S. durable goods orders, which are big-ticket items like cars and computers meant to last three years or more. The forecast: overall durable goods orders, up 1.5 percent in November.

RALLY MORE - OR REST?

Even if this week's numbers drive stocks higher, some analysts cautioned that the year's final two weeks could surprise the market with turbulence. Investors might opt to sell shares and take profits before closing 2006's books.

"We need a rest. We started the year-end rally early and the market's had a very dramatic run," said Al Goldman, chief market strategist at A.G. Edwards in St. Louis.

"There's a correction out there someplace, but momentum says that's not going to happen over the very near term, so I think you have to respect that and say we're probably going to go higher."

Besides the data, this week will shine the spotlight on the earnings of some notable S&P 500 components: Circuit City Stores Inc. (CC), the No. 2 U.S. electronics retail chain; FedEx Corp. (FDX), whose FedEx Express unit is the world's No. 1 express package delivery service; Oracle Corp.(ORCL), the world's biggest maker of database software, and Walgreen Co.(WAG), the No. 1 U.S. drugstore chain.