The coming week on Wall Street will be largely shaped by events in Washington, with investors anticipating the passage of an economic stimulus bill while awaiting more details on how the Obama administration plans to save the nation's ailing financial system.
Many analysts are expecting the government's moves to give the market a boost but warn that the euphoria could be short-lived, in keeping with a recent pattern where the reality of the economy's woes overshadows early optimism over government initiatives.
"You have Wall Street watching Washington and you have Washington watching Wall Street," said Marc Groz, managing member of Topos LLC, a Stamford, Conn.-based asset manager and risk advisory firm. "How it plays out is very unclear."
The Senate is expected to pass an $827 billion stimulus bill on Tuesday. The administration, however, still faces difficulties reconciling the Senate bill with the House's $819 billion version that passed earlier. President Barack Obama is pressing to have the stimulus measure — designed to pull the economy out of the longest recession in decades — on his desk for signing by mid-month.
Meanwhile, investors are also anxiously awaiting a speech by Treasury Secretary Timothy Geithner on Tuesday outlining the Obama administration's plan to overhaul the government's $700 billion financial bailout program. Geithner had been scheduled to announce the plan Monday, but Treasury spokesman Isaac Baker said Sunday that the administration wants to spend that day focused on the Senate's effort to pass the stimulus bill.
JPMorgan equity strategist Thomas Lee said this week could be one of the most important of the year, with both the passage of a stimulus and a comprehensive plan for the banks being positive steps for restoring the nation's economy.
"Whatever plan is unveiled, it will establish a framework to rehabilitate the financial system," he wrote in a research note. "The lack of a comprehensive plan has been an obvious source of uncertainty, keeping investors out of equities."
Bank stocks in particular have been under considerable pressure as of late as disappointing fourth-quarter earnings reports and forecasts for rising loan losses in 2009 have investors worried about the potential for a major bank failure. At the same time, investors have been concerned that new government efforts to prop up banks could hurt shareholders by diluting the value of their stock.
Many investors are hoping the government will relax accounting rules requiring businesses to assign a value to all of their assets each quarter. Critics have argued that so-called "mark-to-market" rules have hampered banks amid the deepening financial crisis, mandating that they take unnecessary writedowns that don't reflect the true value of soured mortgage-related assets and the prices they may garner in the future.
According to a report in The Wall Street Journal on Sunday, Geithner is also considering partnering with the private sector to help banks rid themselves of their toxic assets. The idea is to have private firms buy mortgage-backed securities and other assets, allowing prices to be set by the market instead of the government, the report said, citing unnamed sources familiar with the matter.
Wall Street finished last week sharply higher, boosted by a big rally on Friday in anticipation of the government's plans. Investors were largely unfazed by a terrible jobs report. The Labor Department said U.S. employers slashed 598,000 jobs in January, sending the unemployment rate to 7.6 percent, the highest since late 1992.
The Dow Jones industrials ended the week up 3.5 percent, the Standard & Poor's 500 rose 5.2 percent and the Nasdaq composite index posted a huge 7.8 percent gain.
"I think the market already knows that a package is going to be accepted," said Keith Springer, president of Capital Financial Advisory Services. "That's probably why we had a pre-gain."
More than the passage of the stimulus, investors need to see bipartisan support, Springer said.
"(Investors) want to see people work together," he said. "They want to see both sides believe it's going to work."
What's more, the realization that the government's efforts will take some time to have an impact on the economy will likely keep investors on the sidelines, analysts said.
"When you have a run-up on the hope that the bill will be passed and you know that the bill is palliative and there's a lot more pain to come, why do you want to buy? What is your theory?" said Groz. "There's no rush to get back into equities."
As earnings season winds down, investors will keep a watchful eye on economic reports for signs the government's efforts are working.
"The market has to decide emotionally if the worst is behind us," Springer said.
Among the economic reports this week, the Commerce Department will release figures on wholesale trade inventories for December on Tuesday, followed by its report on international trade on Wednesday.
The Labor Department will release its weekly jobless claims report on Thursday. Also Thursday, the Commerce Department will issue a report on January retail sales as well as business inventories for December.
Homebuilders Beazer Homes USA Inc. and Toll Brothers Inc., and beverage makers Molson Coors Brewing Co., Coca-Cola Co., and PepsiCo Inc. are among the companies reporting financial results.