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Investors are heavily betting the Obama administration's bank rescue plan, to be unveiled tomorrow, will extend the stock market's rally into next week and bolster the fragile United States economy.
The broad KBW Banks index surged nearly 12 per cent on Friday and major indexes also rallied last week ahead of specifics from US Treasury Secretary Timothy Geithner on the White House package to stabilise the financial system.
"This week could be one of the most important for 2009," said Thomas Lee, US equity strategist for JPMorgan, in a research note. "Whatever plan is unveiled, it will establish a framework to rehabilitate the financial system."
Equally important, Wall Street investors and traders will look to lawmakers to swiftly craft the $900 billion (Dh3.3 trillion) economic stimulus package brewing in the Senate, following a government report showing the biggest one-month job losses in 34 years.
The Dow Jones industrial average closed up 217.52 points, or 2.70 per cent, at 8,280.59 on Friday. For the week, the Dow rose 3.5 per cent, the Standard & Poor's 500 was up 5.2 per cent and the Nasdaq Composite Index saw its best week since early December, up 7.8 per cent.
Overall, anticipation of the stimulus package and the bank rescue plan trumped the grim jobs report on Friday as well as an earnings season beset with unusually poor results and worse outlooks.
This week investors will parse through corporate results from the likes of Dow component Coca-Cola Co and entertainment and media giant Viacom for further details about corporate prospects in 2009.
So far, 286 companies in the S&P 500 have reported results for the latest quarter, with 58 per cent beating estimates and 34 per cent missing the median Wall Street forecast, according to Thomson Reuters data.
Illustrating the extent of the economic weakness will be the latest batch of data next week, including a report on international trade from the Commerce Department tomorrow and a report on consumer sentiment due on Friday.
"It's going to be horrible news on earnings, it's going to be horrible news on economic statistics," said Michael Pento, senior market strategist at Delta Global Advisors in New Jersey. "The biggest thing I'm looking for is what form Timothy Geithner's plan is in. What does his bank rescue plan look like."
Financials helped spur the rally late in the week, but the week's other standout was the technology sector.
So far this year the five biggest weights on Nasdaq – Microsoft Corp, Google, Cisco Systems, Oracle Corp and Apple – have seen their shares rise, while the S&P 500 has fallen 3.8 per cent during the same time. In coming days, investors are looking to the Treasury to aid the battered banking sector, seen as key to invigorating the economy.
"Sentiment in the financial sector is very, very important, and we're all anticipating Monday," said Paul Nolte, director of investments at Hinsdale Associates, in Hinsdale, Illinois.
The Treasury said last week that it had already disbursed $294.92bn from the Troubled Asset Relief Programme, but it has made further pledges that would leave it with about $320bn to tap. The Treasury is due to release its January budget on Wednesday.
How the Treasury deploys the remaining $700bn financial bailout, approved by Congress in October, will be outlined tomorrow by Geithner. "It wouldn't surprise me if it had some kind of capital injections or some kind of government guarantees," Pento said.
He added that other measures were possible, such as "a plan to take these assets off the banks' balance sheets and put them in an aggregate bank that's owned by the government".
The sustainability of any rally will stem from the details about the stimulus and bank rescue plans, which Obama hopes to pass by mid-February.
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