Investors gird for higher oil, bleak housing data

The rising price of oil isn't just swelling Americans' energy bills - it's also holding back their stock portfolios.

Wall Street got some seemingly auspicious signs last week about home construction and consumer level inflation. But with oil climbing to new records, and more reports expected this week on rising prices and the housing market, investors are holding on to a conservative stance.

Oil's stubborn trek to record highs is a major reason why investors have yet to push the major indexes into positive territory for the year. Just this month, crude has so far tacked on about $13 to breach $127 a barrel, while the price of a gallon of gasoline for the average U.S. driver has soared 17 cents to nearly $3.79.

Those price surges cast an air of skepticism over last week's report from the Labor Department showing a modest 0.2 percent uptick in consumer prices in April.

Meanwhile, the Commerce Department's upbeat report on housing starts also met with some doubt among investors, particularly because the huge rise was due mostly to apartment construction, which can vary widely from month to month.

"So are we at an inflection point in housing right now? Very possibly. But let's be clear here. Nothing in the data suggests we're about to see a sharp rebound," wrote Bernard Baumohl of the Economic Outlook Group LLC in a research note.

Still the market, betting that better times are not that far off, finished the week with a solid advance. The Dow Jones industrial average rose 1.89 percent, while the Standard & Poor's 500 index gained 2.67 percent and the Nasdaq composite index picked up 3.41 percent.

The existing home sales report will be key this week. The National Association of Realtors is expected to report on Friday that sales of existing home fell again in April, according to the median estimate of economists polled by Thomson/IFR.

Another important piece of data will be the Labor Department's Tuesday report on producer prices, is expected to show a 0.5 percent rise.

The information could help Wall Street determine whether it is consumers or businesses who are paying more of the rising costs of energy, food and other commodities. Neither prospect is positive for Wall Street; businesses need to hold down costs to pull in healthy profits, while consumer spending accounts for more than two-thirds of gross domestic product.

"There may be some factors that are helping to control inflation," Strauss said, noting that many businesses are holding back wage increases. "That's a shock absorber to inflation."

But he added, "consumers are feeling the pinch here. What they have to spend on nondiscretionary items is going up. At the same time, real income growth is being challenged."

Investors will get more information on how strapped consumers are in earnings reports next week from retailers including Home Depot Inc., Hewlett-Packard Co., Staples Inc., Target Corp., BJ's Wholesale Club Inc., Barnes and Noble Inc. and Gap Inc.

As data pile up, they will give not only investors but also the Federal Reserve a better idea of where the economy is headed in the second half of the year. On Wednesday, the Fed releases minutes from its April 29-30 meeting, when it lowered key interest rates by a quarter percentage point and flagged inflation as a growing concern. Many investors expect the central bank to keep rates on hold at its next meeting in late June to keep inflationary pressures in check.