Long after Fourth of July celebrations end, investors can expect fireworks for the Dow Jones Industrials (DJINDICES:^DJI) this week, as earnings season officially begins. Yet with all the attention that Alcoa (NYSE:AA) and Wells Fargo (NYSE:WFC) will get when they report on Tuesday and Friday respectively, you still need to pay attention to a couple key pieces of economic news as well. In particular, the Fed will release its minutes from the latest meeting of the Federal Open Market Committee, and a report from the Energy Information Administration on the status of oil inventories could have implications for the strong-performing energy sector. Let's take a closer look at what investors are expecting to see from these key events this week.
Earnings season begins
Neither Alcoa nor Wells Fargo is in the Dow, but their results will have dramatic implications for Dow stocks and other companies throughout the stock market. For Alcoa, investors expect the aluminum giant's recovery to continue, with Alcoa's decision to specialize in higher-margin value-added products reaping rewards over simply producing commodity-grade aluminum. With strong demand from the aerospace, automotive, and heavy-vehicle industries for aluminum components, Alcoa hopes that its strategic shift will keep it on track to boost profits and make the Dow Jones Industrials regret having dismissed the company from their ranks.
Wells Fargo, meanwhile, is likely to deliver slightly better earnings per share to investors despite a drop in revenue. Higher interest rates could continue to weigh on Wells Fargo's mortgage business, but investors have been impressed by the bank's ability to avoid the worst of the fallout from the financial crisis and find new ways to make money. With a combination of bank-branch downsizing to save on costs and non-mortgage consumer loans to keep margins high, Wells Fargo aims to become the most valuable bank in the stock market.
What the Fed will say
On the economic front, investors will scrutinize the FOMC's latest meeting minutes to try to figure out the thought process for monetary policy-making. Currently, most commentators expect the Fed to continue its gradual reduction of quantitative easing purchases, but the wildcard is when the Fed will actually move to increase the Fed funds rate and thereby push short-term interest rates higher.
Opinion is mixed on when the Fed will raise rates, precisely because other economic data have been so inconsistent lately. On one hand, first-quarter economic conditions were horrible, with a huge drop in GDP and hundreds of companies reporting negative impacts from the bad weather and other causes. Looking forward, though, we've seen numerous signs of a return to more typical levels of economic activity more recently, and leading indicators pointing to a better future have some expecting the Fed to act sooner than later. Most expect rates to rise at some point next year, and that could end up being a key inflection point for the Dow Jones Industrials.
Oil prices heading higher?
Finally, the EIA report on oil inventories will have an impact on the Dow because of the key role that gasoline prices have on Americans' household budgets. Gasoline prices over the holiday weekend were at their highest levels since 2008, and few expect conditions pushing gas prices upward to go away anytime soon. Yet with U.S. consumers having gotten used to prices near the $4-per-gallon mark, there's reason to believe that the Dow Jones Industrials won't suffer even if inventories shrink and argue for higher prices ahead.
After solid gains for the Dow, watch to see if the average can hold the 17,000 level. Bad news could lead investors to head for the exits after such a long rally, although continued good news could sustain the upward streak even longer.