U.S. Stocks Expected To Build On New Highs In Coming Week

SAN FRANCISCO (MarketWatch) - The rally in U.S. stocks that propelled the S&P 500 Index and Dow Jones Industrial Average to new highs in the last few days will extend into the coming week as corporate merger activity and expectations of less inflation keep pushing the market higher, strategists said.

Productivity figures will be the centerpiece of a light week of economic data. But ushering in the first full trading week in June will be last Friday's report that showed U.S. payrolls expanded by 157,000 jobs in May, as well as a reading of consumer prices that showed inflation is under the Federal Reserve Board's comfort level.

Combined with dealmaking that doesn't appear to be slowing down, strategists said Wall Street's benchmark indexes should push even further into new territory, though bond yields approaching 10-month highs are starting look more attractive to investors. The yield on the benchmark 10-year Treasury note jumped to 4.96% on Friday.

"We'll get some residual effect from the economic numbers," next week, said Paul Nolte, director of investments at Hinsdale Associates. "The data is not real hot at this point and it's not recessionary, so it keeps the Fed on the sidelines."

Stocks shot to record highs this past week as a slew of economic reports dovetailed with the central bank's previously stated view that the economy will pick up steam without significantly igniting inflation during the second half of the year.

"Through fits and starts, the market is going higher," said Doug Roberts, chief investment strategist at Channel Capital Research.

Among some of the better performers were A.G. Edwards Inc. after it agreed to an $6.8 billion acquisition by Wachovia Corp. ; Apple Corp. following its plan to allow Apple TV users to stream YouTube videos; Ciena Corp. after the telecom equipment company posted better-than-expected quarterly results; and Dow Jones & Co. after its controlling shareholders agreed to meet with its suitor, News Corp. . Dow Jones owns MarketWatch, the publisher of this report.

Roberts said investors are taking in stride the possibility that the Fed will not cut rates this year, though they haven't completely set aside the notion that a rate hike could be in the cards as the Fed keeps watch in part on higher energy prices.

"This is like a holding pattern over the airport and the pilot says, 'We're still holding, refresh your drinks. You may have wanted additional moves, but I'm sorry this is what it is."

The central bank will hold its two-day rate policy meeting beginning on June 27.

China syndrome

Wall Street held its ground this week following a 6.5% drop in Chinese equities Wednesday after authorities unexpectedly raised the taxes on stock trades, a move aimed at cooling the market. The last time the benchmark Shanghai Composite Index suffered so deeply was in late February, when it sparked a selloff in stock markets worldwide.

"You have a [U.S.] market that really doesn't want to go down," said Doug Sandler, chief equity strategist at Wachovia Securities. "You can throw a lot of bad news at this market...and in the end, it finds a way to wiggle its way to the upside."

Still, as investors search for ever-higher returns, what could provide more competition for equities is the bond market. The 10-year note's yield note hit its highest level since mid-August of last year on Friday as Treasury prices continued its fourth straight week of losses. Prices and yields move in opposite directions.

Nolte said investors will likely begin to move more money into the bond market if that yield can hold at or above the 5% level throughout the next week.

Sandler said that the market's resistance against sustainable losses in recent weeks signals to him that there are still buyers waiting to jump into the market and are doing so during its dips and as more M&A deals are unveiled.

May ws a busy month for corporate tie-ups, with nearly 2,570 deals valued at about $496 billion unveiled worldwide, including $191 billion coming from the U.S., according to data from Thomson Financial.

In the comparable month a year ago, $317 billion in global mergers were announced.

Sandler said M&A activity is still in a healthy phase because the deals appear to be strategic and focused creating value. He recalled the end of 2000 when "companies bought companies because they were scared because they were going to get left out...when companies probably didn't even do due diligence and said, 'We've got to secure ourselves some landscape here.'"

The mining and metals sector has been leading this latest phase of takeover activity. But "from financial services to industrials, I don't think there's a particular sector," that's more vulnerable than others to M&A action, said Nolte.

"There's a lot of money looking for deals and whichever ones work well are what's going to fly," he said.

Economic reports

The week's reports will feature the first-quarter productivity report on Wednesday from the Labor Department. Economists polled by MarketWatch expected a slight downward to 1.3% from 1.7%. The Fed watches the report for signs of wage inflation.

Factory orders for May are due on Monday from the Commerce Department. Economists are expecting a 0.8% rise in factory orders in April, down from 3.5% in May.

The Institute of Supply Management's report on the services sector is May, due on Tuesday, expected to slip to 54.5% from 56% in April. Readings above 50% indicate expansion.

The wholesale inventories report for April, due Thursday, is forecast to remain unchanged at 0.3%. Also on Thursday, the Federal Reserve is expected to report that consumer credit in the U.S. declined to $7.5 billion in April from $13.5 billion in March. The March result had been the largest jump in revolving and nonrevolving credit since November of last year.

Friday's market

The S&P 500 closed up nearly 6 points on Friday to 1,536.34 to mark its third straight new high this week. At the same time, the Dow Jones Industrial Average rose 40 points to 13,668.11 and the Nasdaq Composite picked up 9 points to end at 2,614.

The blue-chip index gained 1.2% this week; the broad market gauge rose 1.4% and the tech-heavy Nasdaq added on 2.2%.

Crude-oil prices rose $1.07 to $65.08 a barrel, aided by higher gasoline prices.

Gold futures surged $10.20 to $671.20 on Friday, and ended the week up 2.4%.

The dollar on Friday hit a fourth-month high against the Japanese yen and a seven-week high against the euro. For the week, the dollar gained 0.3% vs. the yen and was little changed against the euro.

By Carla Mozee