US stocks closed out 2009 with the best performance in six years, but monthly employment figures in the first week of the new year will keep investors focused on what is likely to be 2010's reality – the economy's struggle to recover.
On the data front, the main event will be Friday's report from the Labour Department on US non-farm payrolls in December. Economists polled by Reuters have forecast that payrolls shed 20,000 jobs in the final month of 2009, compared with just 11,000 lost in November. The Institute for Supply Management's report on manufacturing, due tomorrow, is expected to show the ailing sector was still slow to expand in December, while a projected drop in November pending home sales, due on Tuesday, will underscore the housing market's shaky recovery.
Major factors in the stock market's 2009 rally have been ultra-low interest rates and the Federal Reserve's purchases of securities. A repeat of November's much better-than-expected unemployment report could cause investors to worry that the Fed will increase borrowing costs sooner than previously thought.
Thomas Wilson, managing director of institutional investments at Brinker Capital in Berwyn, Pennsylvania, said the unwinding of the fiscal and monetary stimulus, possibly in the second half of 2010, will be a "delicate and deliberate process" that could ruffle markets.
Expectations that interest rates may rise sooner than expected have been helping the US dollar recently, which could make a sustained move higher – if expectations for higher rates increase further. The stock market moved inversely to the dollar through most of 2009. A continued bounce in the greenback in 2010 could hurt stocks. "The market's reaction to the generally stronger dollar is going to dictate a lot of the investment themes for the first half of 2010 and maybe the year at large," said Bruce Zaro, chief technical strategist at Delta Global Advisors in Boston.
Despite a 65 per cent gain in the S&P 500 from its 12-year closing low in early March, stock investors have lost money this decade when total returns are taken into account. Few will be overwhelmed with the long-term performance of their portfolios.
As 2009 ended, Wall Street capped its first-ever negative decade on a total return basis, even with dividends reinvested. Nevertheless, investors will remember 2009 as the year that the US stock market made a substantial turnaround from its plunge in 2008 when fallout from the implosion of sub-prime mortgages and the credit crisis forced Lehman Brothers into bankruptcy – changing the landscape of Wall Street forever.
For 2009, the Dow Jones industrial average climbed 18.8 per cent, the S&P 500; shot up 23.5 per cent and the Nasdaq surged 43.9 per cent.
Friday's non-farm payroll report is expected to confirm that US job losses continued to bottom out in December. The data is also likely to reinforce expectations that the US unemployment rate will peak in the first half of next year.
The US unemployment rate is expected to edge up to 10.1 per cent in December after it unexpectedly fell to 10 per cent the month before.
In December, the Fed stuck to its commitment to keep interest rates close to zero for an "extended period". Some investors took November's unemployment number as a sign that rates may need to rise faster. That debate could start again if Friday's number is better than expected.
Better economic data "will raise concerns about the possibility the Fed will tighten earlier than most investors anticipate, but given what we're hearing from the Federal Reserve, it seems unlikely", said Carmine Grigoli, chief US investment strategist at Mizuho Securities, in New York.
- The author is a columnist with Reuters. The views expressed are his own
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