The Coming Week: Time to Bounce Back, Right?

After an awful four days last week, the stock market came back a bit on Friday, but can it be sustained?
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Not even a spoonful of sugar would have made last week's market go down smoothly. The question is: Will next week be any sweeter?

Despite Friday's modest upswing on the

Nasdaq Composite Index, last week's profit warnings from PC maker

Gateway

(GTW)

and specialty chipmaker

Altera

(ALTR) - Get Report

have left Wall Street with a very bitter feeling.

In the week ahead, investors will focus on a full slate of economic data, which they can expect to reveal additional evidence of a slowdown. Key reports include the November

Employment Report and the third-quarter

Productivity and Unit Labor Costs. And they will hope to avoid any additional nasty earnings preannouncements.

November's employment report, slated for release on Friday morning, contains information about both job and wage growth and is considered the single best measure of the health of the economy. The November edition of the jobs data is expected to confirm that economic growth is slowing.

Economists polled by

Reuters

forecast the change in nonfarm payrolls -- the report's main feature -- to be 151,000 during the month of November. While that number is greater than last month's 137,000 personnel gain, it's significantly below the 12-month average increase of 195,000 people on nonfarm payrolls. Hourly earnings are expected to rise 0.3%, compared with last month's 0.4% advance.

What's more, economists predict that the unemployment rate will increase to 4.0% from 3.9%, the 30-year low. A 0.1% gain on an already low figure may not seem too extreme, but any increase in the unemployment rate suggests deceleration. The past week's

initial jobless claims number rose to 358,000, the highest since July 1998, from 339,000 the previous week.

"We're looking for a weakish employment report," said Brian Jones, economist at

Salomon Smith Barney

. "Eventually, the

Federal Reserve is going to have to move the

Fed funds rate lower."

Indeed, slower growth could prompt the Fed to ease its interest-rate policy, which was tightened in a series of interest-rate hikes over the past year to combat inflationary risks. At its last meeting, the

Federal Open Market Committee left interest rates unchanged, but cautioned that the threat of rising inflation was greater than the danger of an economic slowdown. Now, some economists think the policy-making body could move away from its inflationary bias -- the first step toward a potential rate cut.

"The most reasonable thing for the Fed to do is go neutral in its Dec. 19 meeting," added Jones. "In six months, we'll be 50 basis points lower. But we're still three steps -- biased neutral, biased ease, ease -- away from cutting rates."

On Wednesday, revised data for Productivity and Unit Labor Costs hit the Street. Preliminary figures for the third quarter showed a decrease in productivity and an increase in unit labor costs. "If that trend continues," said Ian Morris, chief U.S. economist at

HSBC

, "it won't make the Fed feel good. But it won't make them constrain their stance since they're focused on growth, which is plummeting."

"If productivity goes down and unit labor costs go up, that will be bad news for the market," added Doug Cliggott, equity strategist at

J.P. Morgan

. "But, what will dictate whether or not the market rises or falls will be what kind of preannouncements we get."

Investors can only hope that they won't witness the kind of warnings they saw last week, when Gateway and Altera curbed their fiscal outlooks for the fourth quarter and brought the market to its knees.

To review, the Nasdaq dropped 109 to 2598 on Thursday, closing below 2600 for the first time since Aug. 12, 1999, and erasing more than a year's worth of gains. The technology-laden index is now nearly 50% below its March highs. For the week, the Comp ended down 8.9%, while the

Dow

finished behind 0.92%.

"We're in for a very heavy confession season," said Joseph Kalinowski, equity strategist at

I/B/E/S

. For the upcoming fourth quarter, I/B/E/S has tracked 300 preannouncements, compared with 240 for the entire fourth quarter in 1999. "What is generally a very quiet time has been filled with profit warnings."

In addition to Gateway and Altera, companies as high profile as

Dell

(DELL) - Get Report

,

Ford

(F) - Get Report

,

Lucent

(LU)

,

Kulicke & Soffa

(KLIC) - Get Report

and

Applied Materials

(AMAT) - Get Report

have curbed their forecasts for the upcoming quarter. Preannouncement season is not even supposed to

begin

until the second week in December.

According to I/B/E/S, announcements are coming out of the auto, technology and retail sectors. In the heart of the holiday shopping season, some on Wall Street are expecting weak retail sales. In a report released Friday,

Merrill Lynch

said: "We continue to expect weak Christmas sales, which presents additional implications for December stock performance."

Not everyone is convinced the situation is so bad. "The consumer is not quite ready to put away his wallet," said Joseph Abate, economist at

Lehman Brothers

. "Consumer volume is coming at the expense of discounted prices." According to a Lehman Brothers report put out on Friday, "consumers, economists and the Fed are likely to enjoy this holiday season, but some of the good cheer will be at the expense of retail stores."

While by no means a busy week on the earnings front, there are still a few companies of note slated to report. Earnings data roll out from

Albertson's

(ABS)

,

Heinz

(HNZ)

and

National Semiconductor

(NSM)

.

"The market will trade on any incremental earnings news," said Cliggott.

Who knows? This time next week we might even have a president-elect. Stay tuned.