Stock markets ended one of the most volatile months in years on an impressive note, but this coming week still won't be any easier for investors as the employment report and housing turmoil remain high on radar screens.
Federal Reserve Chairman Ben Bernanke acknowledged on Friday the problems in subprime lending and reiterated that the central bank will take the necessary steps to shelter the economy from turmoil in financial markets.
But he warned it is not the responsibility of the Federal Reserve -- nor would it be appropriate -- to protect lenders and investors from the consequences of their financial decisions.
Investors, returning from the Labor Day holiday, and if lucky, a long summer vacation, will be watching closely for any further deterioration in the housing and consumer markets.
September is turning out to be a critically important month for the markets, said Keith Wirtz, president and chief investment officer at Fifth Third Asset Management in Cincinnati.
It could be an inflection point because that's when we'll get companies pre-announcing how they are performing in the third quarter and what they see for the remainder of the year.
For the week, the Dow Jones industrial average and Standard & Poor's 500 fell 0.2 percent and 0.4 percent, respectively. The Nasdaq Composite Index posted slightly higher returns on the week, at 0.8 percent.
SPOTLIGHT ON LABOR MARKET
The housing downturn has turned the spotlight on the tight U.S. labor market.
Friday, the government releases the August employment report, which could reinforce a view that the Fed would slash the federal funds rate by quarter-percentage-point at its September 18 meeting.
A softening in the labor force is seen by many Fed watchers as a prerequisite to a cut in the fed funds rate from its current 5.25 percent, where it has been since June 2006.
Signs of softness have already emerged on that front: initial jobless claims in Thursday's report rose for a fifth straight week, to the highest level since mid-April.
You want to look at metrics associated with the consumer, so employment, income and retail are some of the biggest data points being scrutinized, Wirtz said.
Results from retailers recently have been sending mixed signals about consumer spending.
Upscale jeweler Tiffany & Co on Thursday reported better-than-expected quarterly results and boosted its fiscal 2007 earnings outlook, citing a reasonably favorable retail environment.
However, Sears Holdings, the nation's No. 2 retailer after Wal-Mart, also on Thursday said its second-quarter profit had tumbled 40 percent because of lower overall sales and weaker operating results from Kmart and its domestic Sears operations.
U.S. STOCKS UP IN AUGUST
Since early August, central banks from around the world, including the Fed, have poured funds into money markets to tackle a liquidity crisis, stemming from the upheaval in the subprime mortgage market, which has made many banks freeze up on normal interbank lending.
Bernanke must be pleased at the recovery that the financial markets have enjoyed since they cut the discount rate, said Tom Sowanick, chief investment officer at Clearbrook Financial LLC in Princeton, New Jersey.
Notwithstanding the volatility in August, the Dow Jones and S&P 500 are both up for the month 1.1 percent and 1.3 percent, respectively. The Nasdaq also gained in August, returning 2 percent.
In August, the S&P experienced its largest swings from high and low since October 2002.
If the markets continue to perform with a positive tone into the next Fed meeting then the odds of a rate cut will be greatly diminished, Sowanick said.
Indeed, with the exception of last September, the Dow industrials have fallen by an average of 1.1 percent in each September since 1950, according to the Stock Trader's Almanac.
Meanwhile, the index has gained an average of 0.5 percent in October, the month when 10 bear markets -- including the most recent in 2002 -- have ended.
BUSH ADDS TO MOMENTUM
For now, U.S. stocks are enjoying this week's rebound, bolstered on Friday amid optimism a White House-proposed mortgage assistance could ease liquidity conditions.
President George W. Bush set out measures to help homeowners with subprime mortgages refinance into new loans, but warned that the government's job was not to bail out speculators.
Bush's comments were in concert with remarks earlier by Bernanke that it was not the central bank's responsibility to protect lenders and investors who made mistakes.
The Fed chief said in a speech to a symposium in Jackson Hole, Wyoming, that the easing of some traditional institutional and regulatory frictions seems to have reduced the sensitivity of residential construction to monetary policy, so that housing is no longer so central to monetary transmission as it was.
(Additionally reporting by Ros Krasny)