Week Ahead: Wall St.'s Bull Wants to Run
It sounds almost too good to be true.
Wall Street's bull wants to run in 2008, but its success will depend on whether the U.S. economy avoids recession and the credit crunch continues to ease.
There's a growing chorus of investors who believe U.S. stocks will outperform other markets next year. In the week ahead, big investors will start to put on new trades for 2008, and while they see the market moving forward, they also see lots of volatility.
Look at the past year.
Really, it wasn't too shabby a performance by U.S. equities, if you consider the high level of volatility and current conditions: There's still a credit crunch; earnings growth is slowing; the housing market is in recession, oil and other commodities are hitting highs, and the dollar is near record lows. Plus, there's the threat the U.S. economy could go tumbling into recession.
But the view of many big investors is that the stock market will continue to move ahead in 2008, and in fact, will fare better than some other investment choices. These investors believe recession will be avoided, slower earnings growth is already in valuations, and the financial companies will clean house -- transforming themselves into attractive market leaders once more.
Of course, the Fed has to accommodate by cutting rates to keep markets and the economy moving.
Believe me, this was not the view we heard a few weeks ago, when the credit crunch drove fear through November's markets. But as investors review the year ahead, there's a more bullish tone than we might have expected to hear.
The Dow last week was off 0.63 percent, but it held gains of 7.24 percent for the year. The Nasdaq is up 10.7 percent for the year after losing 0.65 percent for the week, and the S&P 500 is up 4.24 percent on the year, after losing 0.40 percent for the year.
David Kotok, chief investment officer for Cumberland Advisers, sees the credit crisis easing in '08, which he says means the economy will experience just a mild downturn, not a recession. If that's so, the U.S. market will be more attractive than some other developed-nation equities markets.
"I think the U.S. economy turns north before the other advanced economies. They're trailing," Kotok said.
Consider the view of some institutional investors, surveyed recently by both Merrill Lynch and Citigroup. When Citi asked its biggest clients which group would outperform global equities markets, managers by a wide majority -- some 28 percent -- put U.S. stocks at the top of the list, followed by about 16 percent for Asia/Pacific emerging markets. Third was Japanese equities.
At the bottom of the barrel: bonds, European equities and private equity in that order.
Merrill Lynch's global managers weren't so decisive on U.S. stocks, but still they saw opportunity.
In its study, 32 percent surveyed told Merrill they would overweight U.S. stocks in the next 12 months, but 25 percent said they saw the U.S. stock market as the most overvalued. These fund managers were moving away from European equities, strong performers in 2007.
Kotok, a CNBC contributor, also believes the financial companies will flush out their problems in the coming quarter, helping their performance. He's not alone: We've seen a flurry of comments from analysts who say they are dipping into financials.
In the Citi study, institutions said the best performing sectors in the next year would be tech, then financials. In the case of financials, it's hard to see them getting worse. You may recall we spoke to J.P. Morgan's chief U.S. equities strategist Thomas Lee a few weeks ago, and his view was that the financials would lead the stock market higher next year.
The first week of the year gets off to a busy start with some major data. First on New Year's Eve, existing home sales for November is the last piece of key data before year's end. The bond market closes early that day but stock exchanges are open until 4pm ET as usual. Obviously, markets are all closed on Jan. 1.
The most important data point of the week is December's jobs report, reported Friday at 8:30am ET. Consensus expectations have fallen to an anemic 50,000 from a prior estimate of 94,000 new jobs. The unemployment rate is expected to move to 4.8 percent from 4.7 percent.
Other important data includes December ISM manufacturing data Wednesday morning, and the minutes of the FOMC's December monetary policy meeting, released Wednesday at 2pm ET.
On Thursday, ADP's preview jobs data is released, as are jobless claims and factory orders for December. ISM non-manufacturing data is also released Friday.
Big on the economic agenda is the speech by Fed Vice Chairman Donald Kohn Friday at 3:30pm ET. He speaks on macroeconomic policy to a conference for economists in New Orleans.
Oil closed out the week at $96 per barrel, up 2.9 percent. Gasoline was up 3.4 percent for the week at $2.4597 per gallon, and heating oil climbed 1.1 percent to $2.6370 per gallon.
Gold was up 3.3 percent for the week to $839.60.
Treasurys saw buying this week. The yield on the 10-year fell to 4.098 percent and the two-year was at 3.128 percent Friday afternoon.
The dollar fell 2.4 percent against the euro for the week. Late Friday, the dollar was $1.4716 per euro. The dollar also fell against the yen, losing 1.4 percent for the week.
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