Fed, Recovery Hopes to Spur Rally

Santa Claus may make an early visit to Wall Street next week as investors, betting on an economic recovery in 2002, are expected to send stocks higher.

The U.S. Federal Reserve will give a helping hand. It is likely to cut short-term interest rates by a quarter percentage point to 1.75 percent to help push the U.S. economy out of recession, according to a Reuters poll on Friday.

The Fed convenes next Tuesday at this year's final policy-setting meeting.

More important is what Fed chief Alan Greenspan will say when the rate decision is announced at about 2:15 p.m. There's rising belief he will signal the central bank's aggressive rate-slashing campaign is drawing to a close, reinforcing investors' bets that a recovery is not too far off.

"The Fed, from time to time during the year, wanted to slow the pace of easing, and I just don't see the need for as big a step, as the economy seems to be getting a grip on itself,'' said Alan Levenson, chief economist at T. Rowe Price. ``At the same time, it's premature to send a signal that they are ready to stop.''

Potentially capping gains are worries that stock prices are getting too rich after major market gauges have rallied as much as 40 percent from three year-lows set in the wake of the devastating Sept. 11 attacks.

"I see a market trying to work higher over the next week or so, but gains are limited,'' said Peter Cardillo, director of research at Westfalia Investments. ``Investors are in two camps: some are saying that valuations are high right now, and then there are those who say the market is discounting better times ahead. I am in that camp.''

The market bulls have now sent key indexes right through attention-grabbing levels for the first time in months, with the blue chip Dow Jones industrial average and the tech-packed Nasdaq composite index finishing the week above 10,000 and 2,000, respectively.

The wild card, of course, remains the war in Afghanistan and the U.S. hunt for Saudi-born militant Osama bin Laden, wanted dead or alive by Washington, which accuses him of masterminding the Sept. 11 hijacked aircraft attacks on New York and Washington, which killed around 3,900 people.

The militant Taliban abandoned their last major stronghold of Kandahar on Friday, but confusion surrounded the fate of Taliban spiritual leader Mullah Mohammad Omar whose whereabouts were unknown amid violence and confusion. U.S.-backed anti-Taliban forces also have found no trace of bin Laden.

``The war in Afghanistan may also play a big part. The market could rally if bin Laden is captured,'' Cardillo said.

Retail Sales, Other Data

Also impacting stocks will be a slew of economic data that will give more clues on the status of the U.S. economy, which has been mired in recession since March of this year.

Key among the reports will be November retail sales figures due ahead of the open on Thursday. These are expected to come in weak after a big surge in October fueled by incentives such as zero-cost financing to buy new cars.

At the same time, inflation data for November — the Producer Price Index on Thursday and Consumer Price Index (CPI) on Friday — are likely to paint a benign picture, leaving room for further rate cuts.

Friday's trading session also will digest business inventory data for October and industrial production numbers for November. The later likely will show an 0.4 percent fall, but at a slower clip than October's 1.2 percent drop.

Dealers polled by Reuters see an interest-rate cut of 25 basis points on Tuesday. A majority think the Fed will cut another quarter percentage point in January. So far in 2001, the Fed cut rates 10 times, bringing the federal funds rate to 2.00 percent.

"I would imagine the market will like ... both their interest-rate cut and what they have to say,'' said John Forelli, portfolio manager at Independence Investment which oversees $20 billion.

The Fed will say ``we're going to continue to be concerned about economic weakness, i.e., we're going to continue to be willing to cut rates if we deem necessary. That being said, we're pretty close to the end of the interest rate cycle.''

Corporate Pre-Announcements

Wall Street will also pay attention to so-called corporate pre-announcements on how the current quarter is shaping up. Amid potential bombshells, investors also should look out for some good news, like recent upbeat remarks from top tech companies Intel Corp., Oracle Corp. and Cisco Systems Inc. 

The tech companies "didn't destroy the psychology this week,'' said Barry Hyman, chief investment strategist, at Ehrenkrantz King Nussbaum. "Intel guiding toward the higher end of revenue, and the Cisco story, which was still open-ended but didn't say things are getting worse, led to more understanding that growth is the story for 2002.''

Stocks fell Friday as the jump in the U.S. unemployment rate spooked investors, but the key equity indexes finished the week higher.

Nasdaq rallied 4.70 percent this week and is up a hefty 42 percent since it slammed to three-year lows on Sept. 21. The broad S&P 500 index and the Dow also rose this week and have climbed almost 20 percent and 22 percent since Sept. 21.