NEW YORK Stocks may get a lift next week as regulators are expected to name the first round of banks allowed to repay bailout funds. The move could feed hopes that the banking system is stabilizing further.
But widespread skepticism over the sustainability of the recent rally from 12-year lows in March remains as bears keep looking for signs of economic weakness.
The wild cards in the coming week include the jump in the price of oil, now near $70 per barrel, and the leap in U.S. Treasury bond yields, with the 10-year note's yield near 4 percent.
Investors also will sift through a government report on May retail sales and data on consumer sentiment for clues about the state of mind of consumers, whose spending accounts for two-thirds of U.S. economic activity.
"From the market's point of view, the repayment of TARP (bailouts) is a big positive in that it shows that private equity is available and capable of coming in and funding the banks," said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co, in San Francisco.
But even though the repayment of money from the $700 billion Troubled Asset Relief Program is seen as an important psychological step, there are also concerns that the banks may repay the money too soon while selective repayments may stigmatize some lenders.
"The potential negative is that people start looking at it and saying these guys have been able to pay it back, but other people haven't," said Doug Roberts, chief investment strategist at Channel Capital Research in Shrewsbury, New Jersey. "There could be a concern that the government will have to go back in again."
There is also concern that the repayment of TARP may rob the economy of money that could be lent to consumers and businesses.
The S&P 500 index .SPX is up nearly 40 percent since a hitting a 12-year closing low on March 9, largely on hopes of an economic recovery. But indexes have drifted since early May as investors look for more catalysts to drive the market.
In a historic turn of events on Wall Street, General Motors (GM.N)GMGMQ.PK and Citigroup (C.N) will lose their place in the blue-chip Dow industrial average .DJI on Monday, marking a fall from grace for two once venerable American corporations.
SPOILER MAY BE OIL NEAR $70
Steadily rising oil prices have started to cause concern, with some investors worried that higher prices may put pressure on the all-important consumer, dampening the speed of a recovery. Crude futures jumped to a seven-month high above $70 a barrel on Friday before falling back to settle down 37 cents, or 0.5 percent, at $68.44 on the New York Mercantile Exchange.
John Praveen, chief investment strategist at Prudential International Investments Advisers LLC in Newark, New Jersey, said that "when you are getting too close to the $70 range, you begin to wonder whether the rise in oil is going to start being a burden for the economy."
Trends in oil prices will be a factor in Wednesday's report on the international trade deficit for April and Friday's data for May on import prices and export prices.
The Federal Reserve's Beige Book, an anecdotal report from the Fed's 12 districts, will shed some light on the economy's health when it's released on Wednesday afternoon.
WORRY OVER RISING BOND YIELDS
Similarly, rising Treasury yields, which reached as high as 3.9 percent on Friday, marking the loftiest level in more than six months, are causing concern that consumers and businesses may face higher borrowing costs.
Investors will watch the results of a 3-year note auction on Tuesday and a 10-year note auction on Wednesday to gauge investors' appetite for swallowing ever increasing government debt.
"We have seen bond yields back up over the last couple of weeks and if they keep going up, there is growing concern that that could short-circuit the recovery," added Praveen. "If the recovery becomes questionable, then you might see a pullback in equities."
up 4.2 percent.
May retail sales, due on Thursday, are expected to show an increase of 0.5 percent including auto sales, compared with April's drop of 0.4 percent. Excluding auto sales, May retail sales are seen up 0.2 percent, compared with April's fall of 0.5 percent.
A preliminary reading for June from the Reuters/University of Michigan consumer sentiment index is due on Friday.
"Investors will continue to watch to see if economic data is improving," said Michael Sheldon, chief market strategist of RDM Financial in Westport, Connecticut. "The trend over the past few months has been encouraging, but there is still a long way ahead before we can say that the economy is growing, and it's growing on a sustained basis."