updated 12/31/2006 3:12:29 PM ET 2006-12-31T20:12:29

The first trading week of the year may be a short one, but it may help determine whether the stock market’s record-breaking run will continue or melt down in 2007.

Major Market Indices

The three days will be filled with data on employment, the manufacturing and service sectors, and sales figures from retailers and automakers. These will provide clues to Wall Street’s big question: Is economic growth still cooling, or starting to heat up?

During the last trading week of 2006, despite thin holiday trading volumes, the Dow Jones industrial average rose above 12,500 for the first time after a promising report on new home sales suggested the economy may be turning around. If the first week of January brings good news, the Dow could hurtle further into record territory, extending its fourth-quarter rally.

Hearty economic growth may not line investors’ pockets, however, if it leads the Federal Reserve to believe Americans can withstand an interest rate hike. Such a move by policy makers has the potential to stop the market’s rally because of fears that higher rates will crimp consumer spending and deal a further blow to the housing market by making mortgages harder to pay off.

The stock market will be closed on Monday for New Year’s Day and on Tuesday for President Gerald R. Ford’s funeral.

Economic data
The first trading day of 2007 will kick off with the Insitute for Supply Management’s December report on the manufacturing sector — an area of the economy that cooled in 2006 due to a slowing housing market and struggling automakers, but that didn’t faze the stock market.

The market expects the ISM’s manufacturing index to come in at 50, indicating neither expansion nor contraction. That’s above November’s reading of 49.5; that was the first time the index showed contraction in nearly four years.

Investors will also be reading the Federal Open Market Committee’s minutes from its meeting on Dec. 12, when the policy makers decided to keep interest rates unchanged. The markets widely believe the Fed will leave the benchmark rate steady again at 5.25 percent, as it’s done since August, when it meets Jan. 18. But expectations of a hike later in the year could rise if the minutes released Wednesday express heightened optimism about growth and concern about inflation.

Wednesday will also bring November data on construction spending and factory orders, as well as December auto sales figures. The market expects 2007 to be the year that Toyota Motor Corp. usurps Ford Motor Co.’s title as the world’s largest automaker.

On Thursday, the country’s largest retailers announce their sales figures for December — the biggest shopping month of the year, and a bellwether for consumer spending. Investors may be in for a disappointment; retail analysts brought their holiday predictions down a notch after Christmas, saying that while online and luxury item sales surged, most retailers saw shoppers spending conservatively.

The ISM will also release its December report on the service sector on Thursday. The index is expected to come in at 57.0, slightly below November’s reading of 58.9. The service sector stayed strong relative to the manufacturing sector in 2006, suggesting that economic weakness is fairly isolated to the housing- and auto-related industries.

The Labor Department caps the week with its reports on December nonfarm payrolls and the unemployment rate. The market expects the data Friday to show payrolls rose by 110,000 and unemployment held at 4.5 percent. The U.S. jobs picture has remained fairly stable in the face of an economic slowdown, which has helped buoy the stock market’s confidence in Americans’ spending power.

After taking a holiday vacation last week from releasing financial results, major corporate earnings will start trickling in again on Thursday.

Wall Street expects Constellation Brands Inc., the world’s largest wine maker, to report earnings Thursday of 60 cents a share for its fiscal third quarter. Constellation Brands closed at $28.98 on Friday, after hitting a 52-week high of $29.14 earlier in the session. Its shares hit a 52-week low of $23.32 in April.

Meanwhile, analysts predict herbicide and biotech seed producer Monsanto Co. will report earnings Thursday of 58 cents a share for its fiscal first quarter. The maker of herbicide RoundUp closed at $52.53 on Friday, at the upper end of its 52-week range of $37.91 to $53.49.

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