Wall Street opened 2010 riding momentum from last year's strong rally even as doubts emerge about the market in view of an uncertain pace of recovery from the brutal recession. In the coming week, the focus turns to the health of the American consumer with data on retail sales for December, offering clues on spending which accounts for two-thirds of economic activity.
Also affecting trade will be the start of corporate earnings season with Alcoa the first of the major blue-chip firms to release financial results from the fourth quarter. In the week to Friday, the Dow Jones Industrial Average of blue chips gained 1.82 percent to 10,618.19, its best level in 15 months as the market was able to shake off a disappointing report showing ongoing US job losses.
The tech-dominated Nasdaq composite advanced 2.12 percent for the week to 2,317.17 and the broad Standard & Poor's 500 index climbed 2.68 percent to 1,144.98. The positive start for 2010 came after a dramatic rebound last year that lifted the Dow by 18.82 percent, with the Nasdaq up 43.9 percent and the S&P 500 index rising 23.5 percent. Some analysts say the rally still has legs even after the sizzling gains since lows of last March.
David Kotok, chief investment officer at Cumberland Advisors, said he sees the uptrend in place even if there is a "corrective selloff" sometime this year. "Stocks still have room to go higher before this bull market is over," he said.
"Productivity and profits will be unusually high coming out of this post-crisis recession. We expect the US stock market to close the 'Lehman gap.' That could bring stocks to the pre-Lehman (Brothers) failure (of 2008) level of over 1,250 on the S&P 500 index."
But some of the optimism about a recovery for the economy and the market were dampened by Friday's report showing a further loss of 85,000 jobs with the unemployment rate holding at 10 percent. The data "shows that the labour market recovery is anemic," said Aaron Smith at Moody's Economy.com.
"Until confidence is restored, the labour market recovery will be gradual and uneven. Although layoffs are slowing, the poor hiring environment should remind policymakers that they need to continue to support the job market." The US economy is growing but mainly due to gains in manufacturing as companies ramp up to replace inventories after a big drawdown.
Dean Maki at Barclays Capital said a key to the recovery "is how households respond to the additional labour income generated by the production rebound." "If consumers respond by raising their spending, the recovery will likely become self-sustaining, as production rises further in response to sales gains, generating additional income, and so on."
With this in mind, the key report for the coming week will likely be Thursday's data on US retail sales for December, which includes the crucial holiday season. "All eyes will be on December's retail sales figures," said Meny Grauman at CIBC World Markets.
"Despite the fact that unemployment is close to a 27-year high, consumer spending has been surprisingly resilient in the early stages of this recovery. We agree that sales likely closed the year by posting another monthly gain, but expect household spending to lose steam later in 2010." On the corporate front, Alcoa's earnings Monday will be followed by one from banking giant J. P Morgan Chase on Friday, ahead of a flood of results in the following weeks.
David Rosenberg at Glusking Sheff & Associates said the market is too optimistic about earnings in light of a sputtering economy. "Most economic forecasters see nominal (economic) growth at 4.0 percent for this year. But strategists see, on average, 36 percent profit growth," he said.
He argued that the economic growth "is only enough to boost profits by 10 percent if the normal relationship holds up." Bonds ended the week mixed. The yield on the 10-year Treasury bond eased to 3.808 percent from 3.843 percent a week earlier and that on the 30-year bond rose to 4.695 percent against 4.641 percent. Bond yields and prices move in opposite directions.
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