Investors may have to do some emotional juggling as the trading week begins.
While markets around the world assess the fallout from Dubai's worrisome debt problems, investors trying to get a handle on the global economy will also have to factor in some encouraging U.S. retail sales over the Thanksgiving weekend. The question for many is whether they should focus on the possibility of another spreading credit crisis, or signs that consumer spending in this country may indeed be stabilizing.
News that Dubai's investment arm, Dubai World, could default on $60 billion in debt sent world markets skidding on Thanksgiving, and U.S. stock markets initially followed when trading resumed Friday after the holiday. Wall Street regained some ground as overseas exchanges stabilized and as analysts reported that U.S. banks had relatively limited exposure to the problems in the Persian Gulf city-state.
Dubai World's troubles gave a jolt to investors who had set aside many of their concerns about risk during the stock market's almost nine-month rally. Suddenly, they had to worry that the crisis in Dubai could be a harbinger of similar problems in other countries.
"Markets were getting a bit complacent," said Jeff Mortimer, chief investment officer at Charles Schwab Investment Management. "This is a wake-up call" that the economic recovery is going to be choppy and uneven, he added.
Investors might get some reassurance from Sunday's news that the United Arab Emirates' central bank will offer additional liquidity to banks, a move designed to keep credit markets from freezing up. But if traders decide to hunker down rather than take on more risk, they're likely to keep selling stocks and turn to the relative safety of Treasury bonds and the dollar.
Right now, some analysts aren't worried that the stock rally might be in jeopardy — and say traders may decide to focus on growing evidence of a U.S. economic recovery.
"I don't think it's big enough to be a game-changer," Mortimer said of Dubai's debt problems. "It gets my attention. But does it push the trains off the tracks and is everything lost? Certainly not."
Retailers' reports that Thanksgiving weekend sales were respectable may be a pleasant distraction for the stock market. Store owners said shopper traffic was up from a year ago, and held steady through the weekend after a big surge Friday. However, consumers were focusing on the basics, as expected.
Investors have been concerned that rising unemployment would make consumers reluctant to spend on nonessentials. The market will get stores' official take on the weekend on Thursday, when many of the big companies release their sales results for November.
The first few days of December will also bring key economic reports including the Labor Department's November employment report, scheduled for Friday. The number of jobs being lost each month has generally been declining, with 190,000 slashed in October, and economists surveyed by Thomson Reuters expect that number to have fallen to 130,000 in November.
The unemployment rate, meanwhile, is forecast to remain stable at 10.2 percent.
Analysts have been questioning whether the stock market has gotten ahead of the actual economic recovery, especially since some of its recent advance has been due to the dollar's weakness. Many investors were theorizing that the falling dollar would help guarantee that U.S. interest rates would remain stable, making it easier for companies to borrow. Moreover, when the dollar is down, companies that do business with other countries find it easier to sell their goods and services overseas, and their profits rise when those sales are translated into dollars.
Stocks have been on a fairly steady churn higher since hitting 12-year lows in March. Even with Friday's sell-off, the Dow Jones industrial average is still up more than 57 percent from the March bottom.
The Dow lost 1.5 percent on Friday, but was down less than 0.1 percent for the holiday-shortened week. U.S. markets were closed Thursday for Thanksgiving and closed three hours early on Friday.
The Standard & Poor's 500 index tumbled 1.7 percent Friday, and was essentially flat for the week after a big rally Monday was offset by Friday's declines.
In other economic data expected this week, the Institute for Supply Management releases its monthly readings on the manufacturing and service sectors.
Economists predict the ISM manufacturing index, due out Tuesday, dipped to 55 in November from 55.7 in October. A reading above 50 indicates growth in the sector. The ISM service-sector index, due Thursday, is forecast to have risen to 51.5 last month from 50.6 in October.
"The Dubai incident raises the intensity of the numbers" this week, said Alan Gayle, senior investment strategist for RidgeWorth Investments. Weak economic data on top of renewed signs credit markets haven't fully recovered could be enough to send the market lower and set the tone for December trading, Gayle said.