All eyes will be on Hurricane Gustav and its potential to disrupt U.S. Gulf Coast oil production and refining operations on its expected land-hit early in the week. Any new threat to oil production could boost the price of crude and in turn cause stock investors to sell shares on fears that inflation pressure will rise.
Investors will also contend with a barrage of economic data next week, notably the August payrolls report due out on Friday and two reports on U.S. factory activity from the Institute for Supply Management.
But the hurricane will be the main focus at the beginning of the week. On Friday, officials said the storm would build to a dangerous Category 3 hurricane when it hits land.
In the past week, oil prices have surged and retreated on concerns about the storm's path, strength and the readiness of U.S. emergency officials to handle any disruptions.
Crude oil hit $120 on Thursday before settling at $115 on Friday, bolstered by a stronger dollar.
Gustav "will probably be moving the market one way or the other," said John Praveen, chief investment strategist at Prudential International Investments Advisers LLC in Newark, New Jersey. "If it fizzles then it will be a big relief on oil prices."
Also driving the market next week are several government economic reports.
This data comes after the U.S. government said gross domestic product grew at a robust 3.3 percent clip between April and June, above initial estimates of 1.9 percent.
But analysts said the strong showing was largely the result of increased exports.
"If you look at GDP, you're led to believe the economy is solid," said Hugh Johnson, chief investment officer of Johnson Illington Advisor in Albany, New York. "But if you look at the variables -- employment, industrial production and personal income -- the economy does not look solid but weak."
On Friday, all three major indexes fell more than 1 percent and all 30 stocks in the Dow industrials finished in the red.
Economic data added to the market's jitters after a government report showed U.S. personal income fell unexpectedly in July while spending slowed as the effects of a government stimulus package wore off.
An inflation measure hit a 17-year high.
The Dow Jones industrial average closed down 171.47 points, or 1.46 percent, at 11,543.71. The Standard & Poor's 500 Index was down 17.93 points, or 1.38 percent, at 1,282.7. The Nasdaq Composite Index was down 44.12 points, or 1.83 percent, at 2,367.52.
For the month, though, the Dow added 1.5 percent, while the S&P rose 1.3 percent and the Nasdaq gained 1.8 percent.
The August jobs report from the Bureau of Labor Statistics, is also expected to be weak, with an overall decline in non-farm payrolls of 85,000 and no change in the unemployment rate of 5.7 percent for August.
In July, U.S. non-farm payrolls fell for a seventh straight.
Another month of hefty job losses would reinforce those who argue that the economy remains in poor shape, Johnson said.
Market watchers are also awaiting data on U.S. auto and same-store retail sales for clues about consumer spending in the upcoming holiday season, along with the Federal Reserve's Beige Book.
"The markets are extremely volatile and moving according to macroeconomic news quite a bit," said Prudential International Investments' Praveen. "All of this data has the potential to be moving markets."
Investors will also be tracking new developments among financial companies, particularly beleaguered mortgage giants Fannie Mae and Freddie Mac, and Lehman Brothers Holdings Inc, which is shopping its asset management division arm.
Lehman, the fourth-largest U.S. investment bank, is looking for buyers for some $40 billion of commercial mortgages and property on its balance sheet.
Although developments in the race for the White House will not take center stage, analysts said that Wall Street will be watching the Republican National Convention next week for long-term market implications.
Investors will particularly hone in on Sen. John McCain's tax and energy policy, especially following his selection of Alaska Gov. Sarah Palin as his running mate.
"The markets are not going to be happy with an Obama presidency...and McCain is not particularly loved by Wall Street either," said George Schwartz, president at Schwartz Investment Counsel in Bloomfield Hills, Michigan.
But with Palin, "conservatives are going to come out roaring in favor," Schwartz said. "It's going to be a positive influence on economic activity."
Schwartz added that the pairing could impact oil prices, especially if Palin and McCain say they strongly support off-shore drilling.
"That premise of additional supplies is going to further take the speculators out of the market and cause them to put downward pressure," he said.
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