NEW YORK – With the U.S. presidential election finally over, stock investors won't get much of a break next week as they face the next big obstacle — higher interest rates.
A better-than-expected employment report on Friday fueled expectations that the Federal Reserve (search) will raise rates not once — but twice more by the end of the year. Many believe more hikes will come early in the new year.
The Fed's rate-setting body, the Federal Open Market Committee (search), meets Wednesday to decide on the latest expected increase in the benchmark federal funds rate, forecast by most economists to go up a quarter percentage point to 2 percent. It would be the fourth rate increase this year.
While that is usually considered a bad thing for stocks, in part because it raises borrowing costs for companies and consumers, some analysts expect more momentum in the market's rally on the re-election of President Bush.
"I would guess it is going to continue," said Alexander Paris, president of Barrington Research. "Absent the jobs growth, I would have said you have the initial post-election rally, then it would cool and then you would start looking at the economic numbers. I think it is going to continue into next week."
Stocks surged through the end of the week after it was confirmed on Wednesday that Bush had defeated Democratic challenger, Sen. John Kerry, to earn a second term in the White House.
As encouraged as they were by the result — the market views Bush as the more pro-business of the two — investors were particularly relieved not to have had a repeat of the 2000 race, when voting irregularities in Florida left the result in doubt for weeks.
"The fundamentals in the market haven't changed significantly," said David Legeay, senior vice president and director of portfolio management at McDonald Financial Group. "So I think this is more a relief rally, or a psychological rally, than based on fundamentals in the market — although I was encouraged by the jobs number."
"The consumer is still the big question mark in all of this and retail numbers have been a bit soft heading into the Christmas season," Legeay said.
The Dow Jones industrial average (search) ended Friday at 10,387.54, up 3.6 percent for the week, its best one-week performance since March 2003. Meanwhile the Standard & Poor's 500 (search) index hit its highest mark since March 2002, closing the week up 3.2 percent at 1,666.17, and the Nasdaq Composite Index (search) rose 3.2 percent for the week to finish at 2,038.94.
On Friday, the Dow and Nasdaq posted their highest closes since early July.
The Fed aside, investors have a limited offering of macroeconomic data to sift through next week. The big figures are the trade deficit on Wednesday and initial jobless claims, which have been pushed ahead a day to Wednesday because of the Veteran's Day holiday on Thursday.
The bond market is closed Thursday, but stocks will trade that day.
On Friday, the government reports retail sales data for October and investors get their first taste of consumer sentiment when the University of Michigan releases is preliminary survey for November.
The flow of corporate earnings reports will dwindle significantly next week from its recent frantic pace, although a handful of key names are on deck, including networking gear maker Cisco Systems Inc. (CSCO), personal computer leader Dell Inc. (DELL), coffee house chain Starbucks Corp. (SBUX) and discount retailer Target Corp (TGT).
Marsh & McLennan Cos. (MMC), the insurance brokerage targeted by New York Attorney General Eliot Spitzer for allegedly rigging bids, will also report earnings.
By the end of the week, close to 95 percent of the S&P 500 index components will have reported earnings.
The resolution of the U.S. election settled much of the domestic political uncertainty, but international geopolitical concerns can still affect the market in the coming week. Most notably, Palestinian leader Yasser Arafat (search) remained in a coma in a French hospital, and it was not clear who might succeed him should he succumb.
And, as always, oil remains a key focus. The Bush rally was in part supported by a further retreat in oil prices, which finished the week below $50 a barrel for the first time since the first week of October.
"Oil can have, obviously, a major impact on consumer spending — it acts like a tax," said Peter Zuleba, senior portfolio manager, at the Glenmede Trust Co. "I think that oil at these levels becomes a fact that the market has to include in its forecasts going forward. It impacts some companies more than others."
The possibility of a general strike in OPEC member Nigeria on Nov. 16 is most likely to keep oil prices supported in the week ahead because a labor dispute could disrupt oil exports, oil traders said. Nigeria is the world's eighth-largest oil exporter.