Bad economic data? Rising oil prices? Mediocre earnings? It’s the holiday season — all is forgiven.
Wall Street is going into the last week of 2004 with all three major indexes above or at their multiyear highs. Immense investor confidence has buoyed stocks through bad news, and good news is greeted with enthusiasm. Still, as 2005 and fourth-quarter earnings approach — and with stocks becoming ever more costly — Wall Street’s impressive rally might become harder to sustain.
When will the ride end? Analysts are divided, with some saying the rally could continue through at least the end of the first quarter, while others say the fourth-quarter earnings season, which starts the second week of January, could include enough disappointments to create at least a small selloff.
There is always the chance that world events, such as a terrorist attack, could prematurely end any rally, and problems with the upcoming elections in Iraq could certainly cause stocks to fall. However, the markets have been resilient to geopolitical news in recent months. For example, Tuesday’s attack on an American base in Iraq, which killed 22 soldiers and workers, would have caused stocks to drop quickly earlier in the year, but had no effect on the markets last week.
For the week ahead, at least, investors can expect the market to climb, if history is any indication. Analysts say the week between Christmas and New Year’s Day has historically been one of the market’s best. Since 1972, the Dow has gained an average of 0.99 percent in the five sessions between the two holidays.
Last week, the “Santa Claus” rally delivered strong gains on Wall Street despite mediocre earnings and economic news, with the Dow Jones industrial average reaching 3½-year highs for three straight sessions. The Standard & Poor’s 500 also set new 3½-year highs on Wednesday and Thursday. For the week, the Dow rose 1.66 percent, the S&P gained 1.33 percent, and the Nasdaq composite index climbed 1.19 percent.
On tap: Consumer confidence, home sales
A handful of economic reports will receive more attention in the week ahead due to the dearth of other news.
On Tuesday, the Conference Board will release its consumer confidence index for December. Wall Street is expecting a slight rise to 93.5, compared to the 90.5 reading in November. The index has declined for four straight months, and November’s reading was the lowest since March.
The National Association of Realtors will release its November report on existing home sales on Wednesday. Economists expect home sales of 6.75 million, about the same as October. Last week, however, the Commerce Department said new home sales plunged by 12 percent in November from the previous month, the biggest drop-off since January 1994.
If existing home sales fall as well, that could be a cause for concern for many investors — though probably good news for would-be home buyers.
Some profit forecasts expected
No major companies have scheduled earnings announcements in the week ahead, a traditionally slow week for business news. However, investors can expect at least a handful of companies to come out with lower profit forecasts or other bad news. It’s customary for companies to make those kind of announcements in the week between holidays, since, they believe, fewer people are paying attention.
The stock markets, forgoing a New Year’s holiday, will be on a standard schedule all week, including Dec. 31. The bond markets will close early for New Year’s on Friday.