U.S. stocks may rally again this week, buoyed by expectations the Fed may hint it is almost done raising interest rates, while another blitz of corporate profit reports may create some turbulence.
For stock investors, the first focus will be the Federal Open Market Committee's meeting Tuesday -- the last one in Federal Reserve Chairman Alan Greenspan's 18-year rule.
The Fed's policy makers are expected to raise interest rates for a 14th consecutive time, moving the fed funds rate for overnight bank loans up to 4.50 percent from 4.25 percent, according to all 21 primary bond dealers polled by Reuters. In that survey, 17 of the 21 bond dealers said they believe rates will be raised again at the March 28 FOMC meeting, which would be the first with Ben Bernanke as Fed chairman.
More important, though, will be the language in the FOMC's statement Tuesday, which could signal the Fed is tempering the approach to rates after Friday's data showed a slowdown in fourth-quarter growth in gross domestic product, investors said. The Fed began raising rates to curb inflation on June 30, 2004, when the fed funds rate was just 1 percent.
"We may be getting close to the end of this rate-increase cycle and it may be time for the Fed to make that clear," said Hans Olsen, chief investment officer of Bingham Legg Advisers in Boston. "Stocks will benefit from that."
The week's other key events include President Bush's annual State of the Union address Tuesday night and the Labor Department's January jobs report Friday.
Investors also will study a full menu of economic data, including consumer confidence, car sales and factory orders.
Companies whose earnings are likely to draw the closest attention this week are Exxon Mobil Corp. and Google Inc. .
Stocks rallied Friday, with the Dow Jones industrial average and the Nasdaq Composite Index each ending up almost 1 percent. The rally was driven by stronger profits from blue-chip companies like Microsoft Corp. and Procter & Gamble Co., while the slower GDP growth added to expectations for an end to rate increases this year.
The Commerce Department said GDP, which measures the output of all goods and services within U.S. borders, grew in the fourth quarter at an annual rate of 1.1 percent -- sharply below the third quarter's rate of 4.1 percent. Economists had forecast a 2.8 percent gain
For the week, the blue-chip Dow average rose 2.24 percent, while the broader S&P 500 gained 1.76 percent, and the Nasdaq climbed 2.52 percent.
Last week's gains helped push U.S. stock indexes up for the month: The Dow has gained 1.8 percent, the S&P 500 has risen 2.8 percent and the Nasdaq has climbed 4.5 percent.
A January advance in the S&P 500 usually predicts the market's direction for the year, according to Yale Hirsch's "January barometer" devised for the Stock Trader's Almanac.
Higher profits from Dow components such as Microsoft and Caterpillar Inc. boosted demand for equities in January, investors said.
"The economy and corporate America remain solid -- we are going to resume an upward trend and the equity market knows it very well," said Jason Schenker, U.S. economist at Wachovia Corp. in Charlotte, North Carolina. "The sharp drop in the GDP was just a bleep."
Wachovia estimates the U.S. economy will grow at a rate between 3 percent and 3.5 percent in 2006.
Half of earnings reports in
About 50 percent of the S&P 500 companies have reported fourth-quarter operating earnings, gaining on average 12.6 percent year over year, according to Standard & Poor's data.
This week will bring earnings for about 90 companies in the S&P 500, including Dow components Altria Group Inc. and Boeing Co.. Other big names with earnings on tap are Eastman Kodak Co. and Starbucks Corp.
"By and large, earnings are coming in pretty solid and although some of the company guidance we are getting doesn't seem stellar, it's not a sign corporations are in bad shape," said Peter Cardillo, chief market analyst at S.W. Bach & Co.
"Companies are just being more conservative, more cautious with their outlook," he added. "They want to avoid too much volatility in stock prices."
Demand for technology and consumer shares will remain high after companies like Microsoft and Procter& Gamble reported strong earnings, Cardillo said.
"It's a relief for investors to see good earnings reports," he said. "It renewed confidence in the markets."
When President Bush delivers his State of the Union address Tuesday night, investors will listen for clues on the outlook for the U.S. economy in 2006.
"He is more likely to focus on geopolitical and security issues," Wachovia's Schenker said. "But he might also talk about the job and housing markets."
Last week, reports showed the pace of U.S. existing home sales slowed in December, while new home sales climbed.
The government reading on January non-farm payrolls and the U.S. unemployment rate will be released Friday.
Economists polled by Reuters expect the U.S. economy added 240,000 jobs January, up from 108,000 in December. The unemployment rate is likely to remain steady at 4.9 percent.
The week's slate of economic data will kick off Monday with December personal income, personal consumption and the core PCE Price Index, an inflation gauge watched by the Fed.
Tuesday's full agenda includes the Conference Board's consumer confidence index for January, forecast at 104.5, up from December's 103.6, and the National Association of Purchasing Management-Chicago index of U.S. Midwest business activity, forecast at 59.8, down from December's 60.8.
Wednesday, U.S. car and truck sales for January will be reported, plus the Institute for Supply Management's January index of U.S. manufacturing activity. The U.S. Treasury also will announce Wednesday the terms of its quarterly refunding in February, including a 30-year bond sale.
Thursday brings January same-store sales, weekly jobless claims, fourth-quarter productivity and unit labor costs.
In addition to the jobs data, Friday's economic calendar calls for U.S. factory orders for December, the ISM's January non-manufacturing, or services, index, and the University of Michigan's final January survey on consumer sentiment.