While it's crunch time for shoppers, the question for markets is whether the consumer can deliver a holiday surprise this year.
Stocks in the coming week should trade quietly, as more investors sit out until the start of the new year and others start early positioning for 2010. There are a few key economic reports on home sales, jobs and manufactured goods in the holiday-shortened week, and of course, everyone will be watching retail sales.
"From a dollar and cents point of view, it's not as big a deal as it was 20 to 30 years ago, but it is an interesting part of the puzzle because we are at a critical point," said Stephen Stanley, chief economist at RBS. "From our economic point of view, we feel the job market is bottoming out. The holiday season will give, if nothing else, some sense of where the consumers' heads are at."
Many analysts are looking for small, single digit gains in holiday spending, but CNBC's recent Wealth in America survey shows Americans expect to increase spending by an average 10.5 percent. That number is based largely on anticipated, outsized spending increases by wealthier consumers even as lower and middle class Americans pull back.
"I think the outcome is extremely important for the market whether it shows up immediately or in January," said Binky Chadha, chief U.S. equities strategist at Deutsche Bank. "The point is whether it's corporations or retailers, everybody has contracted too much and the evidence of that is the low level of inventories."
"We really need corporate, and perhaps consumers to spend to get this recovery to be self-sustaining. I think evidence that they're spending is key ... Even more important than consumer spending is the corporate spending. We do think that will pick up and they will spend," Chadha said.
The weekend storm on the east coast could be a wild card for some retailers since it impacts key cities, like Philadelphia and Washington on a weekend that was expected to be the busiest time for some brick and mortar retailers. Consumers have also been procrastinating this year, and there was expected to be a heavy push of shopping in the final week.
"It's going to be interesting since it's kind of late to get things done on line," said Art Hogan of Jefferies and Co. Hogan said he expects retailers to come out of this holiday season better than expected, since they have been maintaining leaner inventories, doing less discounting and are therefore enjoying better margins.
Stanley said the biggest beneficiaries of holiday shopping this year have been electronics retailers, specialty stores and online retailers, over the traditional department store chains.
Hogan said a big factor for the stock market in the final two weeks of the year could be to what extent investors, who have been sitting out, start positioning themselves for next year. "I think that will be the biggest driver. I do think we're setting ourselves up for a strong January effect," as investors who are underinvested in stocks start putting money back to work, he said.
The Dow and S&P 500 hit new highs for the year in the past week but finished the week lower. The Nasdaq was higher, however, gaining nearly 1 percent to 2211, and the Russell 2000 climbed 1.8 percent to 610. The Dow was down 142, or 1.4 percent at 10,328, and the S&P 500 rose 0.4 percent to 1102. The dollar, meanwhile, was the big story for markets, gaining 2 percent against the euro for the week and 1.4 percent against the yen. The euro Friday was at $1.4335. Treasury rates were on the rise this past week, with the 10-year yield climbing to 3.548 percent.
The stock market has been trading on relatively light volume, but Friday's volume on the NYSE was a record 3.16 billion shares due to the rebalancing of the S&P 500 and quadruple witching expirations of options and futures.
The four day week ahead includes plenty of data, including a final reading on third quarter GDP, existing home sales and the FHFA home price index Tuesday. On Wednesday, personal income, consumer sentiment and new home sales are reported and on Thursday, weekly jobless claims and durable goods are released.
Thursday is a shortened session and on Friday, markets are closed for the Christmas holiday.
Even as the dollar climbed, oil moved higher in the past week, breaking from the pattern of the "risk trade." But gold moved lower, losing 0.8 percent to $1110 for the week, now off 8.8 percent form its record high of $1217.40 on Dec. 3. Oil finished the week nearly 5 percent higher at $73.36. OPEC meets in Angola Tuesday, but is unexpected to take any action.
The debate among traders has been whether the dollar is in a temporary correction or making a bigger move. "It may be the start of a longer-term trend. The markets are still trying to digest that and put it in perspective. Certainly the moves that happened in the last two weeks are an alarm clock for people who thought it would go down forever," said Natixis senior managing director Gordon Beals. Beals said the gold move parallels that.
He said the dollar could show some weakness before the end of the year but that could be short term. "Overall I think we are looking for a further decline in the euro to the $1.30 to $1.35 region in the next couple of months. That could go hand in hand with a weaker stock market, but they're not married to each other any longer," he said.
"Underlying all this is concern with what is going on in Europe now with the fact that there's 27 members of the EU and perhaps not all of them should have been in it in the first place," he said. In the past several weeks, there has been growing concern about sovereign debt in Europe. Greece's debt was downgraded by two rating agencies and it is a particular concern.
Chadha though said the dollar should continue to rise and it will benefit when it appears the Fed is getting ready to raise rates next year. "We see the dollar at the end of next year significantly higher than it is now," he said.
That same event though could trigger a decline in stocks, but any correction would not be deep, Chadha said. "We think there's likely to be a correction when the Fed raises rates or that starts to get priced into the market. We don't think that should be a big impact because equities look cheap," he said. Chadha expects the S&P 500 to be at 1325 at the end of 2010.
He said the positive comparisons on fourth quarter earnings should be a positive in the first quarter.
"My personal view is the first quarter is very good for equities. We are going to get Alcoa's report, and in the second week of January the financials start to report, and the earnings season is going to go on for quite a while," he said.
Chadha said a stronger dollar does not have to be a negative for stocks. For one, oil would be cheaper, and while hurting oil companies it would help other companies' profits and the consumer.
He said many investors are underweighted in equities and that could draw some money into the market in the first quarter.
"Yes, there's a good potential for a big move in the first quarter and the risk is to the upside," he said.
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