The challenge for stock investors is whether to pocket more of the year's gains or ride it out in hopes of a Santa Claus rally.
The stock market in the week ahead promises to be volatile, after Dubai's move to reschedule its debtblew a chill across risk assets globally and sent investors into the safe haven of the dollar and bonds.
Economic news, particularly the key jobs report for November, will be of high interest to markets already worrying that the economic recovery may not be sustainable. But first, the early returns of the first official weekend of holiday shopping could be a positive for stocks early in the week.
Investors will also be paying close attention to Fed Chairman Ben Bernanke's confirmation hearing before a Senate committee Thursday.
"I think we just saw another shot across the bow to warn investors about the credit riskiness of emerging markets, and for that matter commodities," said Richard Bernstein, CEO of Richard Bernstein Capital Management. "I think it's a huge argument for U.S. assets."
In the past week, the in more than a year Wednesday before Friday's Dubai-driven decline. The worldwide equities sell off was not as heavy in the U.S. Friday, where the Dow finished the shortened holiday week down 8 points on the week at 10,309. The S&P 500 was up less than a point at 1091.
The dollar was trading higheragainst the euro and a basket of currencies Friday. It traded at $1.4953 per euro, after reaching a 15-month low against that currency earlier in the week. The yen though was also rising, reaching a 14-year high before settling back against the dollar. Commodities sold off Friday, and even gold lost some luster. Gold though gained 2.3 percent on the week to $1174.20 per ounce.
"I personally believe the economic statistics are going to gradually improve, and if you believe that you should remain reasonably constructive in the U.S. market despite wiggles up and wiggles down," said Bernstein.
Barry Knapp, Barclays' head of U.S. portfolio strategy, said the big factor for stocks in the coming week will be the November payrolls data on Friday. In fact, he said the employment situation could soon be at a turning point.
"A lot of things point to the market getting concerned with growth. You really do need this turning point on labor or peoples' outlooks will deteriorate for 2010. We've had this massive liquidity driven rally and you've run ahead of the improvement in the core driving fundamentals," he said.
The first move for stocks in the coming week though could be higher, he said.
"There will be the usual euphoria around Black Friday results, then we'll probably fade," he said. "...I think if we get a strong payroll report, we get a sell off in the fixed income market. I don't think we get a huge move (in stocks) between here and the year end."
Knapp said Friday's jobs report could be the start of that turning point. "My base case scenario is we get that inflection point in the labor market, and the outlook will improve and the Fed will start focusing on withdrawing liquidity," he said.
That does not necessarily mean a good thing for stocks. "We've been focusing on next year. My bias would be to think the market trades off in the first half of the year, and then recovers in the second half, and then we end flat," he said.
He also points out that Dubai isn't the only hot spot for investor caution. He said the devaluation of Vietnam's currency in the past week is a warning sign about Asian countries, which have been hurt by China's peg to the dollar. Asian exporters have been disadvantaged by the fact that the falling U.S. dollar has made Chinese exports cheaper.
"Dubai is a bit of a reminder that there's plenty of bad debts in the system, and Vietnam is a warning shot that we have a brewing currency crisis in Asia, not the same as '97, where currency collapses, but we have all these tensions," he said.
Dubai's initial comment Wednesday that it was seeking a six-month standstill on debts owned by its corporate flagship, Dubai World, drew little response in the U.S. but spurred a global sell off over the Thanksgiving holiday. Dubai World has about $60 billion in liabilities. Markets were waiting Friday to see if Abu Dhabi would step in to help. European banks have the most exposure to Dubai but the ripple effects have yet to be seen in U.S. commercial real estate and elsewhere.
Consumer Wild Card
Economists are monitoring this year's holiday shopping season for signs of whether the U.S. consumer will be willing to spend, despite rising unemployment. A strong holiday season could create a ripple effect into first quarter if companies do well and are pressed to rebuild pared down inventories. Many analysts, however, predict just a single digit or two improvement in sales over last year.
"A good Christmas, one better than expected, would be helpful. Expectations are for flat. If we got something in the mid single digits, that would be encouraging. That would help manufacturing and transportation and some sectors of the economy and it would reinforce the inventory swing we are now in the middle of," said Mark Zandi, chief economist at Moody's Economy.com.
NPD's retail analyst Marshal Cohen said he has been expecting growth of 0.5 to 1.5 percent, but retailers' balance sheets should look much better because they are managing inventories better and discounting less. "Last year was the shock for the consumer. It only started for them in October so by a month later it really set in and hit home. This year 'frugal fatigue' is setting in," he said.
Higher end retailers, which represent a small portion of the pie, should fare better, with sales improving 1.5 to 2 percent. Some of those names are Nordstrom ,Saks and Tiffany .
"Retailers are not looking to sell a lot more this year. They're looking to sell a lot more profitable this year,' he said. "It's not going to be about comp store sales. Black Friday is going to turn black in terms of profitability," he said. Consumer discretionary stocks, including retailers, were 1.6 percent higher for the week.
One of the biggest hurdles for the U.S. economy's recovery has been job loss. Unemployment is expected to hold at 10.2 percent when the November employment report is released Friday, and total non farm payroll losses are seen at 120,000.
"If we lose 100,000 to 150,000 jobs that would mean the job market is sticking pretty close to script," said Zandi. "...If we're still around 200,000 or north of that that would be a concern."
The White House in fact is holding a jobs summit Thursday.
Improvement in the labor market would be a help to Fed chairman Bernanke, Zandi said. Though the jobs report comes after the hearing, Bernanke would be more able to defend the Fed's policy of keeping rates near zero if the employment situation were to shows signs of improvement. Weekly jobless claims are reported Thursday, as usual, and are expected to total 492,500, above the prior week's surprising dip to 466,000.
"We do need to get closer to 350,000 a week to get closer to a stable jobs environment," he said.
As for Bernanke, "Hopefully he can calm some of this firestorm that's been brewing, but I think the only thing that's going to help is if these jobs numbers continue to improve. If they do, it helps with these efforts to monitor their (Fed) activities more carefully...If the job market remains tough and doesn't improve, I think calls for more restrictions will continue and it will be harder to come out with a good outcome. Anything that smacks of impairing the Fed's independence will be a big mistake."
Zandi said it's likely Bernanke will come under criticism at the hearing despite the fact that the Fed's actions during the crisis were "perfect"
"It's just a reflection of the frustration of how slow it is for the jobs market to recover," he said.
Zane Brown, chief credit strategist at Lord Abbett, said the Bernanke hearing could be key for markets. Even though the Fed has seen the economy improve, it has not changed the language in its statement which says it will keep rates on hold for an extended period, he said.
"I think Bernanke is going to be under pressure as to why they haven't at least indicated why they have not been more responsive to even their own forecast," he said.
"I think the testimony is going to be more interesting than what we've heard in the past. He's light on his feet. He's likely to take some hits from them, but it's interesting to see how he responds and how long he thinks "extended" might be," he said.
In the Treasury market Friday, the flight to safety move pushed yields on the 2-year to as low as 0.608 percent, but they finished at around 0.687. The 10-year was also creeping lower, at 3.205 percent. Brown said some of the trading that has driven buyers into the short end recently is the result of year end and month end window dressing.
Other data expected this week includes Monday's Chicago purchasing managers' survey. Tuesday data includes ISM manufacturing data, pending home sales, construction spending and monthly auto sales. On Wednesday, the ADP employment report is released and the Fed's Beige book on economic activity is issued in the afternoon. Thursday's data includes weekly jobless claims, productivity and costs and ISM nonmanufacturing data. Factory orders are reported on Friday.
Fed speakers this week include Philadelphia Fed President Charles Plosser who speaks on the economic outlook in Rochester Tuesday. Richmond Fed President Jeffrey Lacker speaks on the economic outlook in Charlotte Wednesday. Plosser also speaks at the Philadelphia Fed's Policy Forum Friday.
The European Central Bank has a rate decision on Thursday morning.
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