With its late-year rally stalled, Wall Street is looking for a new message from Tuesday's Federal Reserve meeting for a possible catalyst as investors position their portfolios for next year.
The main US indexes ended lower in the week to Friday as the pullback continued from a five-week rally.
The blue-chip Dow Jones Industrial Average shed 0.91 percent in the week to Friday to close at 10,778.58 and the broad-market Standard and Poor's 500 index gave back 0.45 percent to 1,259.37. The tech-heavy NASDAQ composite lost 0.73 percent to end the week at 2,256.73.
As a result, the Dow index is essentially flat for the year with the NASDAQ and S&P indexes modestly higher.
The market has been conflicted over strong reports in recent weeks that suggest the economy has overcome the impact of hurricanes Katrina and Rita, but at the same time could prompt the Federal Reserve to boost interest rates further, a move that could crimp growth and profits in the future.
A key this week, analysts say, will be the message from Tuesday's Federal Open Market Committee, which is widely expected to implement its 13th consecutive quarter-point rate hike, but which may tweak the message it delivers to the public and financial markets.
The federal funds rate is expected to rise to 4.25 percent.
"We do not expect a change in substance: the message that rates are likely to rise further after this meeting should remain intact. But the odds of a change in the words that deliver that message may well have risen," said Peter Hooper, economist at Deutsche Bank.
Diane Swonk, economist at Mesirow Financial, said the central bank is gearing up for Ben Bernanke to replace Alan Greenspan early next year and that the new central bank chief will want to boost rates at least once "to establish his inflation-fighting credibility with financial market participants," meaning rates will likely rise to 4.75 percent.
Still, most market participants see the light at the end of the tunnel for the Fed, an end to the rate boosting that has been hanging over Wall Street. And such a move would likely spur gains for stocks.
Standard and Poor's chief investment strategist, Sam Stovall, said he is upbeat for next year based on the current scenario.
"The increasing likelihood that Federal Reserve monetary policy tightening will end as a result of continued strong productivity growth and low core inflation will likely generate a positive macro economic environment for equities," he said in a report.
"As a consequence, S&P equity research analysts project earnings to benefit from solid economic underpinnings, with a projected 11 percent gain in 2006, a record level," Stovall said.
Stovall said the market is still reasonably priced by the measure of price-to-earnings (PE) ratios, a measure of stock prices compared with profits.
Bonds lost ground over the past week. The yield on the 10-year bond increased to 4.537 percent from 4.519 percent a week earlier and that on the 30-year bond rose to 4.736 percent from 4.717 percent.
Bond yields and prices move in opposite directions.
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