Monday will be the last chance for investors to make their final stock plays before the books close on 2007 before the New Year's Day holiday on Tuesday.
The major indexes will end the year higher but overall advances will be subdued as investors were forced to battle a credit crisis spurred by turmoil in the U.S. subprime-mortgage market; a deepened downturn in the housing industry; a near 60% gush in crude-oil prices to close to $100 a barrel; and weaker retail sales as consumers reined in their spending.
But the first few trading days of the New Year could serve as a springboard for a positive January, said Brian Gendreau, investment strategist at ING Investment Management.
"I wouldn't be surprised to see some gains once people come back and take a fresh look at 2008, and some investors get ahead of what may be a rebound," in economic and earnings growth next year, he said. "The question is: do you act now or do wait until you see more tangible signs of a reversal? Some people are going to elect to pull the trigger and get in ahead of the gains."
The first trading week of 2008 may be short, but the list of expected economic reports isn't. Existing home sales data are due Monday, followed by figures about the manufacturing and services sectors, and nonfarm payrolls report for December which will arrive Friday. Minutes from the Federal Reserve's meeting in December will come Wednesday.
On Thursday, earnings results will roll in from Monsanto Co. , Bed Bath & Beyond Inc. , AngioDynamics Inc. , and Finish Line Inc. , whose shares plunged 23% Friday after a court ordered the athletic shoe retailer to complete a $1.5 buyout of Genesco Inc. .
The key to whether a buying spree take place lies within developments in the financial sector, said Cantor Fitzgerald U.S. market strategist Marc Pado, and whether investors are able to regain faith in a group whose biggest names face billions of dollars of write-downs related to subprime losses.
The financial sector accounts for more than 17% of the S&P 500 Index.
Investors need "enough reason to go out there to take a shot at a Citigroup , or other companies in the field," said Pado. "We need the bottom to lift in order to get the market going. We're not going to get [it] going if we continue to see a deterioration in the financial sector. They don't have to lead, but they do have to follow."
Shares of Citigroup Inc. fell after Goldman Sachs said Thursday the company may be forced to cut its dividend by 40% because of write-downs now estimated at $18.7 billion in the fourth quarter. Goldman also forecast write-offs of $11.5 billion for Merrill Lynch & Co. . Separately, the Wall Street Journal on Friday reported that Citigroup and British firm HSBC Holdings are mulling sales of branches to entire units. The report cited analysts and unnamed executives.
Shares of MBIA Inc. and Ambac Financial Group this past week were among the bond insurers whose shares were under pressure after Fitch Ratings put the ratings of residential mortgage backed securities insured by several of the largest U.S. bond insurers on watch for possible downgrades.
Charles Rotblut, senior markets analyst at Zacks.com, said he expects the markets to stay choppy until the fourth-quarter earnings picture becomes clearer.
As of earlier this week, Thomson Financial had pegged earnings to fall 4.5% in the fourth quarter.
But Friday's job report could help smooth out the "topsy-turvy" market, he said, if it comes in as anticipated by the market and shows that the labor market is strong enough to stave off a recession but not so vigoros as to cut expectations for another interest-rate cut in January.
"The biggest risk is if we had a surprisingly strong report with wage growth, which I don't' see happening," said Rotblut.
Economists surveyed by MarketWatch expect the Labor Department to report growth of 78,000 jobs in December, compared with the 94,000 positions created in November. The jobless rate is forecast to tick up to 4.8% from 4.7%. Hourly average earnings, a gauge of inflationary pressure, are expected at 0.3%, down from 0.5%.
On Friday, federal funds futures priced in 98% chance that the central bank will ease the benchmark interest rate by a quarter-point to 4%, according to Action Economics, after the Commerce Department said sales of new U.S. homes fell by a worse-than-expected 9% in November to a seasonally adjusted annual rate of 647,000.
The market will get another housing update on Monday, with the National Association of Realtors' report on existing home sales in November. Economists expect to see some improvement on that front, with sales to rise to 5 million homes from 4.97 million sold in October.
Index rundown; reports due
As of Friday, the broader S&P 500 Index was set to limp in with a 4.4% advance for the year and the Dow Jones Industrial Average was on track to finish up 7.2%.
"Crude and credit crisis sort of have been the one-two punch," he said.
But the tech-laden Nasdaq Composite now stands to end with an 11% gain and turn in its strongest growth since 2003. Still, Pado points out that much of that rise comes on the backs of a "few very powerful names," like Apple Inc. , Google Inc. , and Research in Motion Ltd. .
On Friday, the indexes ended mixed and closed with weekly losses.
Crude-oil futures fell in the final stages of trading to $96 a barrel on the New York Mercantile Exchange, but they packed on 2.9% for the week.
Treasury bonds extended gains on Friday, sending yields sharply lower. The yield on the benchmark 10-year Treasury note was at 4.079%.
The dollar fell against most major foreign currencies as worse-than-forecast data on U.S. new-home sales raised expectations for another interest rate cut.
Gold futures rose for a fifth session in row, and surpassed $840 an ounce.
Shortly after the markets reopen for business Wednesday, they will receive reports on the manufacturing sector of the economy from the Institute of Supply Management. The group's report is forecast to come in at 50%, a slip from 50.8%.
The ISM services index will come on Friday, and is forecast to come in at 53.8% from 54.1%.
Wednesday's construction spending is expected to decline by 0.4% in November from a decline of 0.8%.
By Carla Mozee