New York: Wall Street is likely to make a strong showing in the final week of 2009 as the bulls gear up to toast the first annual advance for US stocks in two years on hopes of more economic stability in 2010.
The US stock market’s resiliency since the March bottom has put investors in the mood to celebrate. The trading week will be cut short by the New Year’s Day holiday on Friday, when US financial markets will be closed.
The S&P 500 is poised for what could possibly be its best year since 2003 -- in sharp contrast to a year ago, when stocks plummeted in the fallout from the mortgage crisis and panic rocked investors as 2009 got under way.
Even though no “all clear” has been sounded for the US economy, equity strategists said stocks were poised to add to recent gains next week and build a base for a solid start to 2010 as optimism about the recovery grows.
There’s an expectation now that economic indicators will keep showing improvements in key areas like housing and the labour market.
“There’s an upward bias,” said Alan Lancz, president of Alan B. Lancz & Associates Inc, an investment advisory firm, based in Toledo, Ohio. “Economic numbers have been good. It’s been an ideal situation for equities as there aren’t that many other alternatives. I think the smarter money is going into equities.”
After starting out November in a tight range, the benchmark Standard & Poor’s 500 vaulted on Thursday to a 14-month closing high as investors bet that the recovery will be strong enough to justify loftier stock valuations. Trading ended at 1800 GMT on Thursday in a session cut short for Christmas Eve. US financial markets will be closed on Friday for Christmas Day.
The S&P 500 is up 66.5% from a 12-year closing low set on 9 March. Its trading levels now imply a forward price/earnings ratio of 15.5, according to Thomson Reuters data.
And oh, what a difference a year makes. The S&P 500 ended 2008 down 38.5%.
But for 2009, the S&P 500 is up 24.7% -- a gain that puts the broad market index on track for what could be its best year since 2003. An even stronger advance next week could put the S&P 500 in position for its best year since 1998.
For 2009, the Dow is up 19.9% and the Nasdaq is up 45%.
Room to run higher
“The market is telling us that the economy is a lot stronger than people are giving it credit” for, said Cleveland Rueckert, market analyst at Birinyi Associates in Stamford, Connecticut.
Although there might be some profit-taking in the final days of the year, the stock market’s underlying tone should still be positive, Reuckert added.
“In our view, the market is going to go higher.”
The ritual of window dressing should also support the stock market in the coming week, according to analysts. That strategy involves selling stocks with large losses and buying winners near the end of the year or quarter to improve a portfolio’s performance.
“The fact that it’s year-end is going to cause a fair amount of volatility on probably relatively light volume,” said Michael James, senior trader at regional investment bank Wedbush Morgan in Los Angeles. “I would expect the bias would be to the upside toward the end of the week.”
Volatility may be enhanced in a holiday-shortened week, when the US stock market will be open for only four days.
And volume may be exceptionally light, with many market participants taking time off through New Year’s Day.
Consumer data and debt auctions
Economic and corporate calendars are light next week. But there are a few items worth keeping an eye on, including the US Treasury’s $118 billion auction of two-year, five-year and seven-year notes.
Investors will watch for how much demand there is for US government debt as efforts to revive the economy pump up government spending.
As the holiday shopping season comes to a close, the Conference Board’s index of December consumer confidence will merit Wall Street’s attention on Tuesday. The forecast calls for a December reading of 52.3, up from 49.5 in November, according to economists polled by Reuters.
Investors will note the October S&P/Case-Shiller home price index, also due on Tuesday.
On Wednesday, the Institute for Supply Management-Chicago’s December index of business activity in the US Midwest region is set for release. The median forecast of economists polled by Reuters puts the ISM-Chicago index at 55.0 in December, down from 56.1 in November. A reading above 50 indicates expansion.
The government report on weekly jobless claims is set for release on Thursday. Reports on the labour market are being scrutinized closely as investors seek to determine when job growth might resume.
November’s surprisingly upbeat non-farm payrolls report showed the US unemployment rate dipped to 10% from 10.2%. That slight improvement in the job market led investors to wonder about the potential removal of some of the US Federal Reserve’s stimulus measures and the prospects for interest-rate hikes next year.
But to keep the fledgling recovery going, the Fed pledged again on 16 December at the end of its last policy meeting to keep interest rates low for an extended period of time.
The Fed is hard-pressed to prevent the economy from sliding back into a slump, which would result in a double-dip recession.
The policy of near-zero interest rates has let investors to borrow dollars cheaply in order to invest in higher-yielding assets like stocks.
“We think it’s a good time to be invested in equities, and equities continue to offer the best risk-reward (ratio) among the major financial assets,” said Tim Ghriskey, chief investment officer of Solaris Asset Management in Bedford Hills, New York.