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Wall Street awaits inflation news, bank earnings

This week’s data on investment bank earnings, the housing downturn and inflation will help investors decide how the economy and corporate America are faring.
/ Source: The Associated Press

Stock investors smarting from months of volatility are hoping this holiday-shortened week provides signs of a badly-needed yearend rally.

The days leading up to Christmas — which in recent years have been positive for stocks — will bring readings on the housing market, minutes from the Federal Reserve’s meeting last month, and earnings reports including results from major retailers. The data should keep investors busy as they stare down tumbling home prices, billions of dollars of losses at banks that made losing bets on subprime mortgages, and crude oil flirting with $100 a barrel.

Though the end of the year usually sparks buying, recent developments have made a December rally look like a pipe dream to many market participants, who are simply hoping stocks can hold onto their gains. The Dow Jones industrial average is up 5.73 percent year-to-date, the Standard & Poor’s 500 index is up 2.85 percent, and the Nasdaq composite index is up 9.19 percent.

At this point, Wall Street expects the U.S. housing market to keep wilting through next year, and perhaps into 2009. It also assumes financial institutions will be taking another giant round of writedowns during the fourth quarter, one that may be larger than the third quarter’s approximately $45 billion in credit-related losses.

What investors remain unsure of is how long it will take the Wall Street banks to bounce back from their losses, and if consumers and the broader economy will survive the worst housing market in decades.

Last week, investors sent stocks higher and lower as they wrestled with uncertainty. The Dow finished last week 1.03 percent; the S&P 500 index ended 0.35 percent, and the Nasdaq finished 0.35 percent.

This week may bring low trading volumes because of the Thanksgiving holiday, but it’s unlikely to be calm.

On Monday, investors will hear from the National Association of Homebuilders on their November forecast for the housing market. Economists surveyed by Thomson/IFR anticipate the index will hold at 18, having fallen to that level in October after eight straight months of declines.

On Tuesday, the Commerce Department is scheduled to report on housing starts and building permits. Economists believe housing starts fell again in October after declining in September to their lowest level since 1993.

Meanwhile Tuesday, the Fed will release minutes from its Oct. 31 meeting, when it lowered interest rates by a quarter-point, after lowering them by a half-point in September for the first time in four years.

Though Wall Street does not want to hear from policy makers that the United States might be headed for recession, it does hope the Fed will lower rates again when it meets Dec. 11. Cheaper borrowing tends to spur economic activity. But policy makers have implied they are not inclined to keep decreasing rates because of the risk of accelerating inflation at the consumer level.

Business sectors like consumer staples, health care, industrials and information technology have been helping the economy grow despite the withering of the housing market.

Wall Street will want to see signs of continuing corporate strength in earnings reports scheduled for this week, including Hewlett-Packard Co., BJ’s Wholesale Club, and Deere & Co. Home improvement retailer Lowe’s Cos., government lender Freddie Mac, and homebuilder D.R. Horton will also release earnings ahead of Thanksgiving.

And after Thanksgiving, as investors do every year, they’ll be watching for hearty holiday spending by consumers on Black Friday, despite high gasoline prices and falling home values.

A strong U.S. consumer might be the fuel the stock market needs to overcome its recent jitters. A weak one could be the coal that Wall Street — which has made some very bad bets this year — is worried about finding in its stocking.