Stocks: Week ahead will test the bulls

NEW YORK (CNNMoney.com) -- There's a growing sense of optimism on Wall Street about the economy, but this week's busy calendar could test the bull's resolve.

Stocks drifted higher last week, with the S&P 500 reaching its highest level since September 2008, while the Nasdaq closed at its highest point since December 2007. The Dow Jones industrial average ended the week little changed.

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But as of last Friday, the Dow and S&P 500 are on track to finish 2010 with 10% gains each, while the Nasdaq is up 16% year to date.

The market has been supported by increasing signs that the recovery is gaining some momentum. Earlier this month, economists at Goldman Sachs (GS, Fortune 500) raised their 2011 forecast for inflation-adjusted U.S. growth to 2.7% from 1.9%, based on gradual improvement in demand.

"The market has been doing pretty well," said Alec Young, equity strategist at Standard & Poor's. "The recovery continues nice and steady in the U.S. and the market looks like it could go higher if that stays intact."

And 'if' is the key word. Investors will have several economic reports to chew on this week, including readings on inflation, retail sales and new home construction.

It's not just the U.S. economy on investors' minds. Europe continues to suffer from debt problems in certain countries, while a report over the weekend showed Chinese inflation continues to rise.

Investors are also closely monitoring developments in Washington. The Federal Reserve's policy makers meet Tuesday, while the debate in Congress over tax cuts and fiscal stimulus is expected to continue.

"The tax debate is a big question mark right now," said Dan Greenhaus, chief market strategist with Miller, Taback & Co. There is also speculation that the Fed may scale back its plan to buy $600 billion worth of U.S. Treasuries, he said.

Stocks rallied in September and October as investors anticipated a second round of quantitative easing, as the Fed strategy is known. But some analysts suspect the program, officially unveiled last month, may get cut short if economic conditions improve significantly.

"If they reiterate their commitment to asset purchases, that would be encouraging for the equity market," Greenhaus said, referring to Fed policymakers.

Treasury yields spiked last week as investors ditched the safety of U.S. debt. Traders said they will also continue to watch the U.S. dollar, which has been gaining ground in the currency market. A stronger dollar typically weighs on prices for certain commodities and can drive down stocks in the industrial sector.

Monday: There are no market-moving economic or corporate events expected on Monday.

Tuesday: Government reports on retail sales and inflation at the wholesale level come out before the market opens.

Economists expect U.S. retail sales to have risen 0.8% in November, according to consensus estimates from Briefing.com. Sales jumped 1.2% rise in October. Excluding the automotive sector, sales are forecast to edged up 0.6% in the month.

The producer price index for November is expected to gain 0.5%, following a 0.4% increase the month before. Core PPI, which excludes food and energy prices, is forecast to rise 0.3%, following a dip in October.

After the market opens, another report is expected to show business inventories grew 0.6% in October.

On the corporate front, BestBuy (BBY, Fortune 500) is scheduled to release quarterly results before the market opens, while homebuilder Hovnanian (HOV) reports after the bell.

The Federal Reserve's policy statement is due in the afternoon. The central bank is widely expected to hold interest rates near 0%, where they have been since the financial crisis took hold in 2008.

Wednesday: The U.S. consumer price index, the government's main inflation gauge, is expected to show that prices rose 0.2% in November, matching the increase in October. Economists expect consumer prices excluding food and energy to inch up 0.1%.

Other economic reports on tap before the market opens are the empire manufacturing survey and government data on industrial production and capacity utilization.

Thursday: The government's weekly report on initial claims for jobless benefits is expected to show a modest uptick to 425,000 from 421,000 in the prior week.

On the housing front, government figures are expected to show that initial construction of single family homes and requests for building permits both rose in November.

Housing starts are forecast to have risen to an annual rate of 545,000 from 419,000, while permits are forecast to climb to 570,000 from 550,000 in October.

FedEx (FDX, Fortune 500) and General Mills (GIS, Fortune 500) are among the companies scheduled to report quarterly results early Thursday. BlackBerry maker Research In Motion (RIMM) is on deck after the market closes.

Friday: An index on leading economic indicators for November is expected to increase 1.2%, after a 0.5% rise the month before.