Upward momentum is back on Wall Street as stocks regained ground at the end of a horrid November, with hopes mounting that the Federal Reserve will cut rates and help the US economy avert a downturn.
The positive market action of the past week helped bring the market back from the edge of the precipice and send the stock market into December, traditionally one of the best months of the year, on an upbeat note. But many analysts say the market is counting on lower interest rates from the Fed, which is set to meet on interest rates December 11.
In the week to Friday, the Dow Jones Industrial Average rallied 3.01 percent to 13,371.72 after four consecutive winning sessions.
The broad market Standard & Poor's 500 advanced 2.8 percent to 1,481.14 and the tech-heavy Nasdaq climbed 2.48 percent to 2,660.96. Despite the sharp gains for the week, the Dow index lost 4.0 percent for November and the S&P index shed 4.4 percent. The Nasdaq slid 6.9 percent.
The sharp rebound for the market over the past week came amid conflicting signals about the US economy. The government said the US economy expanded at 4.9 percent in the third quarter, the fastest pace in four years, but more recent data point to slower conditions.
Some reports suggest consumer spending, a key to economic activity, has been sluggish amid the key holiday shopping season and businesses are cautious due to tight credit and a deep slump in the housing market.
In view of the murky picture, the Fed has been dropping hints that more rate cuts are on the table. Fed chairman Ben Bernanke said Thursday policymakers are carefully monitoring "mixed" economic data, with a depressed housing sector, strong labour market and consumer spending "on the soft side."
Bernanke's comments "were interpreted as all but guaranteeing that the Federal Open Market Committee would cut US interest rates at its December meeting," said Andrea Kramer at Schaeffer's Investment Research,
Still, many traders remain worried that the economy and markets are not out of the woods, with the slide in housing hurting the financial sector as well as consumers.
"The markets are taking (Bernanke's) words as confirmation that the Fed will cut interest rates again at its policy meeting on December 11 and thereby rescue the economy," said Patrick Fearon, economist at AG Edwards.
"However, we believe that even if the Fed cuts rates again in December, it will be too little, too late. In our view, economic activity is still set to slow precipitously," added Fearon, who argues that the environment will remain "bullish" for Treasury bonds in the coming months.
Larry Wachtel at Wachovia Securities said that the Fed may help the markets.
"As has been the case for most of the second half of the year, investor salvation seems to revolve around a friendlier Fed," he said.
Bond prices firmed in the past week. The yield on the 10-year Treasury bond fell to 3.972 percent from 4.012 percent a week earlier, and that on the 30-year Treasury declined to 4.403 percent from 4.438 percent. Bond prices and yields move in opposite directions.
The main economic news for Wall Street in the coming week will be Friday's report on nonfarm payroll job creations and unemployment, seen as one of the best indicators of economic momentum.
Analysts expect the report to show a modest 75,000 jobs created in November, which is below the number needed to absorb new labour market entrants.
The employment report "could help frame the discussion at the FOMC meeting four days later," said Joseph LaVorgna and Carl Riccadonna at Deutsche Bank in a note to clients.
The Deutsche Bank analysts expect the Fed to keep cutting rates.
"We expect the Fed to cut by 25 basis points at the December 11 meeting, and to follow up with two more cuts at the subsequent meetings," they wrote.
"We believe this will be necessary to help keep consumer and business spending afloat while the housing market continues to deflate." The central bank's short-term Fed funds rate is presently pegged at 4.50 percent.
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