NEW YORK (Reuters) - Wall Street may put the brakes on a steep decline next week, when a rate cut is anticipated from the Fed, and Friday's monthly jobs data may trigger a comeback for stocks after their January funk.
Even after this week's two-day rally, stocks finished Friday in the red and remain down sharply for the year so far. The Dow is down 8 percent, the S&P 500 is down 9.4 percent and the Nasdaq is down 12.3 percent.
The Federal Reserve's meeting is expected to result in a reduction of 50 basis points in the fed funds rate, now down to 3.5 percent.
The central bank's announcement will come only eight days after the Fed took emergency action on Tuesday and cut rates by 75 basis points. The move was surprising -- not only for its size -- but also because it came outside of a scheduled policy meeting. The Fed acted as stocks were falling worldwide and about an hour before the U.S. market opened on Tuesday after a three-day holiday.
The Federal Open Market Committee's announcement is expected on Wednesday, at the conclusion of a two-day meeting.
John Praveen, chief investment strategist for Prudential International Investments Advisers LLC in Newark, New Jersey, said investors will study the wording of the Fed's announcement. Indications that further rate cuts are possible will cheer the markets, while signs of future restraint or a "wait- and-see" attitude would be disappointing, he said.
But the Fed will not be the only game in town next week.
A blizzard of economic reports, including data that may show contraction in fourth-quarter gross domestic product, and quarterly earnings from several Dow components, as well as a major speech by the president, will compete with the Fed and the jobs data for investors' attention.
TUNING IN TO THE PRESIDENT
On Monday evening, President Bush will elaborate on his views of the U.S. economy in his annual State of the Union address.
Investors on Wall Street and Main Street are likely to pay more attention than usual to the president's remarks following this week's decision on a tax-rebate plan.
On Thursday, President Bush and congressional leaders agreed on a $150 billion fiscal stimulus package that would include tax rebates for individuals and families.
The plan awaits formal action by Congress.
News of the tax-rebate plan helped stocks extend Wednesday's rally, a day after the Fed's emergency rate cut, into sharp gains on Thursday.
Discussions on shoring up the finances of the "monoline" insurers -- companies that insure trillions of dollars of bonds -- also seemed to soothe frazzled investors' nerves.
"I think we got relief to some extent as a result of what the Fed did, as well as the talks around the monoline insurers and the stimulus package," said David Joy, chief market strategist for RiverSource Investments in Minneapolis. "All three provided some relief from the excessive fears of an economic meltdown."
For the past week, the Dow Jones industrial average (.DJI) rose 0.9 percent and the Standard & Poor's 500 Index (.SPX) gained 0.4 percent. The Nasdaq Composite Index (.IXIC) fell 0.6 percent.