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Don't worry about stocks in the week ahead, but soon ...

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Stocks could see a pullback in the New Year, but for now analysts say the market could ride the Santa rally higher into year end as traders look forward to Dow 20,000.

"There's a lot of window dressing that goes on, and portfolio managers that have to make up for the fact that they underestimated the rally since basically Brexit," said Paul Christopher, global market strategist at Wells Fargo Investment Institute. "Window dressing, Santa Claus rally. Call it what you will. This reflation move is real."

Stocks ended the past week flattish, but the Dow was higher for a sixth straight week since the election. It's been a clear winner in the Trump trade, with financials outperforming and industrials picking up momentum. The Dow was up 0.44 percent for the week, ending at 19,843.41.

I think we've gotten an early Christmas. I think really what we've already seen can be regarded as the Santa rally. We could still see more [gains]—not surprisingly, because who wants to sell out and guarantee they see a higher tax rate than if they sold next year?
Sam Stovall
chief investment strategist, CFRA

"We've probably had most of the move that we're going to see between now and the end of the year. Probably in January, people will start to reassess how soon we will get growth from stimulative policy," Christopher said. He said at some point next year, the market could have a typical pullback of 3 to 5 percent, or even 8 percent.

"There's not really the bad news hanging over our head like there was a year ago. It's not that sort of global risk that we were worried about last year," he said. While he says a correction of 10 percent or more is possible, it's not as likely.

There are a few economic reports in the week ahead that will be important to markets. Existing home sales are released Wednesday, durable goods and personal income and spending are reported on Thursday, and consumer sentiment and new home sales are expected Friday. Fed Chair Janet Yellen also speaks on the job market Monday, but does so at a Baltimore University commencement and will not take questions.

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"We're very ahead of ourselves … We're not calling the top by the end of this year. It could easily run into January. [With] these anticipatory rallies, eventually people do get in, but then you only grind higher. Then it takes only a little bit of bad news, and then everyone wants to take profits at the same time," said Christopher. He added Wells Fargo expects the to end next year between 2,230 and 2,330.

The aftermath of the Fed's rate hike and revised forecast for three rate hikes next year (as opposed to the two hikes that were forecast earlier) could also continue to be a factor. The Fed announcement sent the dollar sharply higher this past week, to a 14-year high, and interest rates spiked after the Wednesday announcement. Yields settled down by Friday, and the 10-year was yielding 2.57 percent in afternoon trading.

Stocks have been rallying on President-elect Donald Trump's promises of government spending, slashed regulations and tax cuts. Anticipation about those promised tax cuts, however, could be supporting stocks only temporarily and cause selling next year.

"I think we've gotten an early Christmas. I think really what we've already seen can be regarded as the Santa rally. We could still see more [gains] — not surprisingly, because who wants to sell out and guarantee they see a higher tax rate than if they sold next year?" said Sam Stovall, chief investment strategist with research firm CFRA.

Stovall said the market, by some measures, has gone too far, but it's not likely to sell off just yet. "There's enough hope and anxious uncertainty that will not be resolved until well into 2017, combined with the desire to avoid paying higher taxes. Those factors will keep the market elevated," he said.

Stovall noted that the cyclical sectors — stocks such as consumer-goods makers, whose price is affected by the performance of the wider economy — started doing well before Trump won the election. They normally perform better than the broader markets in November through April.

"I sort of question whether small caps, Treasury yields, the dollar have all gotten ahead of themselves, and maybe we don't see an instant reversal. Usually we get the mid-December low and then we have a market rally into the end of the year," he said.

The Russell 2000 is up about 14 percent since the election, while the S&P 500 is up about 5 percent. The dollar index this week rallied to a 14-year high, and strategists began looking for the euro to slide to parity against the greenback. It was at 1.04 Friday.

Traders have been speculating that the market will take a break from the Trump rally as the president-elect gets closer to the White House in January.

Christopher did not predict when the market could start to waver. "We do believe that people will ultimately have to deal with some disappointment about the Trump administration and the pace of policy, but having said that, we do think that reflation is real," he said.

What to Watch


9:45 a.m. Services PMI

1:30 p.m. Fed Chair Janet Yellen speaks in Baltimore on the state of the job market


No reports expected


10:00 a.m. Existing home sales


8:30 a.m. Initial claims

8:30 a.m. Durable goods

8:30 a.m. Real GDP

9:00 a.m. FHFA HPI

10:00 a.m. Personal income


10:00 a.m. New home sales

10:00 a.m. Consumer sentiment