U.S. Stocks To Continue Santa Claus Rally Next Week
NEW YORK (MarketWatch) -- Investors will look for Santa's sleigh to go further into rally mode in the final week of 2007 in an attempt to get over the rough second half of the year, during which markets were rattled by the biggest financial crisis in a decade.
Some key economic data, notably on housing, may still put a dent in the rally and remind investors that troubles in real estate and financial markets aren't likely disappearing anytime soon.
"The market has taken it pretty hard on the chin, including over the past month," said Paul Nolte, director of investments at Hinsdale Associates. "With holiday volumes pretty light, it's not going to be too hard to continue higher."
On Friday, stocks rallied on the back of upbeat earnings from BlackBerry maker Research In Motion Ltd. , further fueling enthusiasm for the technology sector and helping set aside concerns about massive write-downs at leading financial institutions.
The Dow Jones Industrial Average rallied 205 points to 13,450, adding up to a 0.8% gain for the week. The S&P 500 Index gained 24 points to 1,484 Friday and 1.2% this week.
Most of the fireworks were seen on the tech-laden Nasdaq Composite Index , which powered ahead with a 51 point-gain to 2,692 Friday, ending the week up 2.1%.
With rising concerns that the housing market and tighter credit will lead the United States into recession, investors have found some solace in hope that tech firms and other multinationals can still benefit from global growth.
"The big question mark is really around earnings," said Owen Fitzpatrick, head of the U.S. equity group at Deutsche Bank. "But we have the likes of Nike, Oracle and Research In Motion still seeing solid capital spending and growth outside of the U.S."
Software maker Oracle Corp. jump-started the rally Thursday as it posted a 35% rise in quarterly profit, topping Wall Street's expectations. Shares of Nike Inc. had their biggest gain in six months after the world's largest athletic shoemaker posted a 10% rise in profit, led by gains in Europe and Asia.
Financial woes
Even the past week, though, saw a continued litany of reports emphasizing the heavy damage inflicted by bad home loans and the resulting global credit crisis on financial institutions.
On Thursday, Wall Street firm Bear Stearns Cos. posted its first-ever quarterly loss as the company's mortgage-related write-down grew to $1.9 billion. On Wednesday, Morgan Stanley unveiled a new $5.7 billion write-down on its way to posting a fourth-quarter loss of $3.59 billion, leading Chief Executive John Mack to refuse a bonus.
Ratings agencies Standard & Poor's, Moody's and Fitch also took aim at bond insurers such as Ambac Inc. and MBIA Inc. , warning they could lower their debt ratings on the firms.
"It's obvious this issue is going to linger for some time," said Deutsche Bank's Fitzpatrick.
The Federal Reserve joined the European Central Bank and other central banks last week in injecting more liquidity in the global financial system. On Friday, the Fed said that it would continue these operations "as long as necessary."
The Fed's auctions of short-term credit only generated moderate demand.
But "to the extent that slightly lower demand [...] filtered through, that can be seen as a healthy development or interpreted as slightly lower risk aversion and liquidity demand," analysts at Action Economics said.
"On balance that should be supportive for stocks and reduce demand for Treasuries, though a lingering safety bid so far shows little sign of abating into year-end," they added.
Economic data
While some investors still bet that growth overseas can continue to support earnings into 2008, U.S. economic data next week will likely remind investors about the troubles at home.
FedEx Corp. , a good gauge of economic activity, reported a 6% drop in quarterly profit Thusday, citing rising fuel costs and weakness in the U.S. economy.
Housing will be in focus with the S&P/Case-Shiller home price index, to be released on Wednesday. Building permits for November will be out Thursday. Figures for existing and new home sales for November will both be released Friday.
The Chicago Fed will release its regional index of business activity for December on Monday. Data on sales of big-ticket items in November is due Thursday.
With all eyes on how the job market is holding up, investors also will monitor the weekly jobless claims figure on Thursday. The market will look for confirmation that consumption held up through December. The University of Michigan will release its consumer sentiment index on Friday.
"All those numbers will push the market pretty heavily one way or the other," commented Hinsdale's Nolte. "But the moves won't really be meaningful in terms of gauging the market because there won't be much volume," he said. "We won't be able to really assess things the first week of January."
By Nick Godt