If the bulls have their way, Wall Street's rally will keep going next week on signs of stability in the labor market. But concerns about penny-pinching consumers during the holiday shopping season and the specter of higher interest rates may be a hurdle to jump.
The Standard & Poor's 500 <.SPX> is up 63.5 percent from a 12-year closing low on March 9, while expectations of a significant sell-off before year-end have waned. Any dip is likely to be met with buyers eager to get into the market.
Investors are optimistic that the U.S. economy is on the path to recovery, albeit a slow one, after Friday's data showed employers cut far fewer jobs than expected in November.
Even so, worries that consumers will remain frugal during the holiday shopping season are keeping a lid on investors' enthusiasm. And after Friday's data showing the labor market picture improved in November, there's speculation that the Federal Reserve may have to raise interest rates sooner than previously expected.
Investors will watch next week's initial jobless claims report for further evidence that the job market is stabilizing, while a separate report on retail sales for November will show how stores fared during Black Friday.
The market's going to be really focused on anything to do with consumer spending and employment data, said Scott Wren, senior equity strategist at Wells Fargo Advisors in St. Louis.
Although I think there's not a lot of hope that we're going to see big, quick improvement in the employment numbers, certainly any surprise good news there, the market is going to like that.
Other data on tap includes a preliminary reading for December on consumer sentiment and the trade deficit for October.
Traders will also watch for any technical breakouts, with the S&P 500 facing resistance around the 1,115 level.
At Friday's close, the S&P 500 finished at 1,105.98, up 6.06 points, or 0.55 percent for the day, after earlier hitting a 15-month high at 1,119.13.
BOTH SIDES OF THE JOB SWORD
Government data on Friday showed the economy shed 11,000 jobs in November -- far less than the 130,000 lost jobs that analysts had forecast.
But the monthly payrolls report is a double-edged sword for the U.S. stock market.
An economy that is recovering more quickly than expected could force the Fed to raise interest rates sooner than anticipated. Holding benchmark short-term U.S. interest rates near zero has been part of the Fed's strategy for the past year
to encourage lending and stimulate economic recovery. Investors are nervous about the central bank taking the protective flooring out from under the economy -- and the stock market -- too soon.
Talk of raising rates will keep the spotlight on the U.S. dollar, which has traded in an inverse relationship to stocks of late. Part of this is due to the carry trade, where investors borrow in a low-yielding currency and use the funds to invest in higher-yielding assets.
If expectations lean more toward a rate increase, investors will move out of carry trade bets. That would bolster the dollar and hurt stocks.
With the dollar rallying, that's telling us to some extent the Fed might have to react sooner, said Owen Fitzpatrick, head of the U.S. equity group at Deutsche Bank Private Wealth Management, in New York.
Currency traders will be among those tuning in to international trade gap report on Thursday, which is expected to show an October deficit of $36.75 billion. compared with a deficit of $36.47 billion in September.
Analysts expect Thursday's weekly initial jobless claims to grow to 460,000, up slightly from 457,000 the previous week, according to a Reuters poll.
SHOPPING WITH SCROOGE
Monthly retail sales for November will show how stores did during Black Friday, which was the day after Thanksgiving.
Black Friday traditionally marks the kickoff to the key holiday shopping season as retailers slash prices to lure consumers.
Early indications are that although shoppers were out in full force, they spent significantly less per person over the Black Friday weekend. Reports so far have indicated that Americans have been more inclined to channel their inner Scrooge -- making a list and sticking to it -- when doing their holiday shopping this year, instead of indulging their shopaholic tendencies.
Consumer spending has been a major driver of economic growth and it will be difficult for the recovery to gain traction without it.
Retail sales, due on Friday, are expected to grow 0.6 percent in November, compared with a gain of 1.4 percent in October. Excluding autos, retail sales are expected to rise 0.4 percent in November from 0.2 percent the previous month.
All eyes are on to what extent the consumer shows up in any meaningful way this holiday season, and to what extent retailers are going to compete on prices in order to move goods, said Matt Kaufler, portfolio manager and equity analyst at Clover Capital Management in Rochester, New York.
Friday's preliminary look at December consumer sentiment will also provide insight on how willing consumers are to spend. The Reuters/University of Michigan Surveys of Consumers index is expected to rise to 68.5 in December from 67.4 in November.
While the final days of December are traditionally good for a short and sweet pop known as the Santa Claus rally, analysts said the market will be hard pressed to add significantly to the run-up it has sustained since March.
I think Christmas came early this year, Kaufler said. When I think of a Santa Claus rally, I think of a fairly sharp rally, and a lot of that is already baked in.
(Reporting by Leah Schnurr; Additional reporting by Caroline Valetkevitch; Editing by Jan Paschal)