Stocks cross into 2011 with a positive tilt, but the December jobs report and other data will put investor faith in the recovery to the test in the very first week of the year.
Traders expect the market to start January on an upswing, as fund managers put new money into equities. Beginning with Monday's ISM manufacturing survey, there is a steady stream of economic reports, capped by Friday's employment data. Monthly auto sales are released Tuesday, and Thursday's chain store sales will give a detailed look at December's holiday shopping.
"Seasonally, it's a good time of year. January through April is a better time of the year for the market. Some of the spigots get turned back on for some retirement plans," said Stuart Freeman, chief equities strategist at Wells Fargo Advisors. "I think the data is key though. You still have a great deal of diversity of opinion as to what GDP is going to do next year, and what the market is going to do." Freeman expects GDP growth of about 3 percent and has a target of 1250 to 1300 on the S&P 500.
Pimco's Tony Crescenzi agrees investors will hang on the economic reports. "One theme no matter what is that throughout the first quarter of 2011, investors will be looking for validation of the moves that have been made in markets in anticipation of improving data," said Crescenzi, senior market strategist and portfolio manager.
"There probably won't be any meaningful reversal of trend in markets, even if data disappoints a little bit. There will be enough patience to sustain the gains. In terms of next week, there's a feeling that the employment statistics at this time of year are very volatile because of the movement of seasonal workers," he said. Economists expect the December jobs report to show a gain of 140,000 non farm payrolls, after November's shockingly weak increase of just 39,000 payrolls and a higher unemployment rate of 9.8 percent.
"What this year should be about is more transfer of spending to the consumer and the consumer running this thing on his own. We saw a little bit of that going into December."
"November was an anomaly. The four months prior saw payrolls average 133,000 per month, and that was an acceleration from about 100,000 per month" he said.
He said the monthly pace should return to 130,000 or better on average. "The pickup in final demand (in November income and spending data) means companies are going to be stretched to bring product to the market whether it's a manufactured product or a service. The more stretched it is, the more pressure to add a worker because if you don't add capacity, your competitors will take market share," he said.
Freeman said unemployment will remain the important story in 2011. "What this year should be about is more transfer of spending to the consumer and the consumer running this thing on his own. We saw a little bit of that going into December. I think the consumer, as the year goes on, is going to see more jobs created. I don't think that it's going to drop the unemployment rate dramatically but I think as the job growth picks up, and the consumer sees more of it and hears about more of it, that will make them more comfortable," he said.
Stocks finished 2010 with double digit gains, but the final week of the year added just four points to the Dow in sleepy, low-volume trade. The Dow ended 2010 with a gain of 11 percent to 11,577, just short of its year high. The S&P 500 gained 12.9 percent for the year to 1257, and the Nasdaq surged nearly 17 percent to 2652.
Commodities were big winners in 2010, with gold up 28 percent; silver up 82 percent, and copper up 31 percent. Oil was up 15 percent, at $91.38 per barrel. The dollar index , meanwhile was up 1.4 percent for the year, but the dollar saw big swings against other currencies, including a more than 13 percent decline against the yen , a similarly steep decline against the Australian dollar , but a near 7 percent gain against the euro .
Treasurys also had their periods of volatility during the year. The 10-year finished the year, with a yield of 3.299 percent, up from its low of 2.382 in early October. Its high yield was 3.996 percent in April.
Are We Getting a New 'Nifty 50'?
For 2011, Wall Street strategists are mostly bullish about stocks though some expect the market to reach its highs before year-end and struggle more in the second half, as stimulus is pulled back by the Fed and corporate margin growth slows. They also expect investors to continue to move out of bonds as rates rise.
"Investors are going to understand they can't stay in bonds, but they don't want to fully embrace stocks so they'll stick with the biggest cap stocks and the biggest dividend stocks," said Jason Trennert, chief investment strategist at Strategas Research.
"What I think is going to happen is you're going to get a new 'nifty 50,' said Trennert, referring to the group of blue chip stocks that were market leaders in the early 1970s.
Trennert has a target of 1480 on the S&P 500 though he says it's possible the index will reach that target ahead of year end and then drop back. Some strategists have embraced the historical pattern that shows the market does well in the third year of a presidential term, but Trennert says that scenario may not happen this time around. "He's (President Obama's) already spent a ton of money. He's going to face fiscal restraint," he said.
Trennert said he is also concerned that the Fed will go too far with its quantitative easing program, pumping up things like gasoline prices and giving the economy too much stimulus. "The question is not whether we're too thin, but too fat," he said.
"It's going to be fun while the party lasts, but the bill's going to come due. I think it's going to be strong in the first half but as it gets closer to 2012, its' going to get tougher," he said.
Freeman shares similar concerns about the Fed policy on his list of worries for 2011. "A lot of professionals are going to watch how much China is slowing the economy with rate increases and whether QE2 money is going into (inflating asset classes) as opposed to jobs," he said.
The Fed is purchasing $600 billion in Treasury securities under its quantitative easing plan. In theory, the easing is expected to hold interest rates low while reflating asset prices by pushing investors into riskier assets.
"From the time they moved into the marketplace, in my opinion, it's impacted a lot of different asset classes, but not rates so much," he said. His other concerns include Europe's sovereign debt.
"I think you're seeing some inflation concern and some concern in the bond market, and investors start to think are they going to lose money in the bond market," he said. "That's one reason we would be seeing some movement out of bonds, and into equities..We're going to see probably decent growth next year and probably a little more inflation than this year and that's typically better for equities."
Freeman said there's a chance that his target may be too low. "If the stars aligned, it's possible the economy could be a little stronger, inflation still modestly low, and you could head upwards toward 1400 towards the end of the year. I would call that a better case scenario. I think margins overall will march a little higher, but at a much lower pace. The key for next year, really is going to be the top line," he said.
Friday's employment report is the big news for markets in the week ahead, but the ISM manufacturing data Monday will also be a factor, as will ISM non manufacturing data on Wednesday.
The Fed releases the minutes of its last meeting Tuesday afternoon. There are also important looks at consumer spending, in both monthly car sales Tuesday and the December chain store sales Thursday. More employment related news comes Wednesday in ADP's private sector employment survey, and Thursday's weekly jobless claims. There is also construction spending on Monday and factory orders on Tuesday.
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