By Ellis Mnyandu
The market's other big test will be the start of the quarterly reporting season for investment banks when Goldman Sachs <GS.N> and Morgan Stanley <MS.N> report results that most expect will show heavy losses.
The U.S. auto industry's survival hangs in the balance after a measure that sought to avert a possible bankruptcy by one or more of the nation's Big Three automakers collapsed in the U.S. Senate on Thursday.
Without government aid, investors fear that a failure of any of the three -- General Motors Corp <GM.N>, Ford <F.N> or Chrysler -- would exacerbate the year-long recession and drag other companies under.
The automakers employ nearly 250,000 people directly and 100,000 more jobs at parts suppliers could hinge on their survival.
On Friday, the White House said it was willing to consider using some of the $700 billion initially approved by Congress to shore up the financial system to help the beleaguered auto industry. But it gave no indication when that help might come.
"It seems the way things are going to play out, they're going to keep the carmakers on life support in the intensive care unit until the new administration takes over," said William Stone, PNC Wealth Management's chief investment strategist in Philadelphia.
"On the other hand, maybe that doesn't help the market, either, because you will still sit there with the other uncertainty that you've got to put away the bad someday."
The bid for auto industry aid comes at the worst time as the United States is transitioning between administrations. President-Elect Barack Obama is set to be sworn in on January 20, succeeding George W. Bush as president.
On Friday, concerns about the automaker's fate rattled investors, causing Wall Street to gyrate between gains and losses in a choppy session. But advancing technology shares helped spark a late recovery.
The Dow Jones industrial average <.DJI> rose 64.59 points, or 0.75 percent, to end at 8,629.68. The Standard & Poor's 500 Index <.SPX> gained 6.14 points, or 0.70 percent, to 879.73. The Nasdaq Composite Index <.IXIC> climbed 32.84 points, or 2.18 percent, to 1,540.72.
For the week, though, the <.DJI> , the Dow still fell 0.1 percent. In contrast, the S&P 500 rose 0.4 percent and the Nasdaq finished the week up 2.1 percent.
THE FED'S LIMBO DANCE
But besides worrying about the auto upheaval, analysts said the Fed's policy meeting probably would give investors pause amid signs that the U.S. central bank is practically running out of room to cut interest rates and would have to try other means to revive the economy.
The Fed is widely expected to lower the benchmark fed funds rate by a half-percentage point to only 0.5 percent from 1 percent at the conclusion of its two-day meeting, which will begin on Tuesday. The Fed's announcement is expected at around 2:15 p.m. (1915 GMT) on Wednesday.
"Investors will be looking at how far they will cut, and even more important is what kind of communication they would do regarding the future course of policy," said John Praveen, chief investment strategist of Prudential International Investments in Newark, New Jersey.
Two weeks ago, Federal Reserve Chairman Ben Bernanke said the Fed could directly buy "substantial quantities" of longer-term securities issued by the U.S. Treasury or government-sponsored agencies to lower yields and stimulate demand.
"Markets are going to be looking for how they are conducting policy forward and what are they going to say about quantitative easing," Praveen added.
RIVERS OF RED INK
As one of Wall Street's worst years comes to a close, investors will brace themselves for Morgan Stanley's and Goldman Sachs' results this week.
Analysts expect a tough fourth quarter for the two banks, and Goldman is widely expected to post its first quarterly loss since going public in 1999.
"It could be tougher sledding as far as write-offs go," said PNC's Stone.
Morgan Stanley is likely to wind up in the red for the second time in the past four quarters.
Since the S&P 500 hit its bear market low on November 21, the U.S. stock market has increasingly showed signs of shrugging off even the bleakest of news as investors bet that the downturn could not possibly get much worse and an economic revival is likely by the second half of 2009.
After the S&P slid on November 21 to its bear market intraday low of 741.02 -- a level last seen in 1997 -- the benchmark index has gained almost 19 percent.
For the year, the Dow is down 34.9 percent, while the S&P 500 is off 40.1 percent and the Nasdaq is down 42 percent.
TAME CPI, WEAK HOUSING STARTS
The coming week's economic calendar is sparse, but reports that will command attention include a November reading on industrial production on Monday.
The U.S. Consumer Price Index and housing starts, both for November, are scheduled for release on Tuesday.
Overall CPI is expected to show a 1.3 percent drop in November, with core CPI, excluding volatile food and energy prices, forecast to inch up 0.1 percent, according to economists polled by Reuters.
On a year-over-year basis, overall CPI is seen up 1.5 percent, the Reuters poll showed.
Housing is likely to show continued weakness, with housing starts forecast to slip to a seasonally adjusted annual rate of 740,000 units in November from October's record low of 791,000, according to the Reuters poll.
A December survey of Mid-Atlantic factory activity is due on Thursday from the Federal Reserve Bank of Philadelphia. The Labor Department also will give the latest reading on weekly jobless claims on Thursday. For a full economic diary, see <ECI/US> The latest data showed initial claims for jobless benefits hit a 26-year high this week.
The roster of Fed speakers is also thin. Federal Reserve Bank of Dallas President Richard Fisher due to speak in Dallas on the historical perspectives on the current economic and financial crisis. For details, see <FED-DIARY>
(Wall St Week Ahead runs weekly. Questions or comments on this one can be e-mailed to: ellis.mnyandu (at)thomsonreuters.com)
(Additional reporting by Deepa Seetharaman; Editing by Jan Paschal)