The calendar may be changing, but Wall Street's worry list remains the same after a blowout year for stocks.
"The big question for next week will be if people get down to business or wait to see if we get any follow-through from the year-end rally," says Paul Mendelsohn, chief investment officer with Windham Financial. "This past year, the second half of the year we've been living from data point to data point, and that could become potentially more critical in 2007."
While 2006 represented a big improvement from the previous year for the major indices, some expect the upside extremes to balance out in January. The
ended the year with a gain of 13.6%. The
Dow Jones Industrial Average
surged 16.3%, and the
"We're finishing the year in an extremely overbought condition, so January could become volatile depending on what some of our data points look like," says Mendelsohn. "The pushes that have taken place in stocks during December have been mind-boggling."
Last week, it was Santa, not the Grinch, who controlled the market. The Dow surged 120 points, or 1%, during the holiday-shortened week. The S&P 500 was higher by 7 points, or 0.5%, and the Nasdaq counted a gain of 14 points, or 0.6%, over the four sessions.
Stocks will be closed Monday for the New Year's holiday and Tuesday for the funeral of former President Gerald Ford. When trading resumes Wednesday, traders hope that the economic data help snowball the Santa Claus rally into something larger.
"Next week is an important, albeit shortened, week," says Mendelsohn. "Everything is going to be very concentrated near the end of the week. However, some people may take the extra days off next week, so we don't know what we're going to get."
The market will get some important key pieces to the economic puzzle for 2007, culminating in the December jobs report on Friday.
But first, Wednesday will bring the delayed release of the minutes from the
Federal Open Market Committee's
last meeting, previously scheduled for Tuesday. During the Dec. 12 meeting, the Fed kept rates unchanged at 5.25% for the fourth consecutive time but judged that some inflation risks still remain.
"With the economic data we've gotten this week, I'm not sure the FOMC minutes will be apropos," says Mendelsohn. "What the Fed said about inflation a month ago is different from what we're seeing in the data now."
Reports on construction spending for November and automobile sales for December from
are also due Wednesday.
The Institute for Supply Management's manufacturing index for December is also on the schedule, as is the services index. Currently, the market expects a reading of 50.0 on the manufacturing side and a services reading of 57.0.
Paul Nolte, director of investments with Hinsdale Associates, says that the ISM figures could be the most important factor for the coming week, and he expects the market to take its cue from the data.
"Traders want to see whether services follow manufacturing or whether manufacturing follows services," says Nolte. "As long as the manufacturing doesn't spill over into services, we could be OK."
Thursday's round of data will begin before the bell with initial jobless claims for the week ended Dec. 30. Factory orders for November will also be released Thursday. Economists expect an increase of 1.5%, compared with a decline of 4.7% in October.
The all-important December nonfarm payroll data should dominate early trading on Friday. Economists project that roughly 110,000 jobs were added during the month, down from 132,000 in November. Investors took a 2.0% growth rate in third-quarter gross domestic product as evidence the economy is slowing, reflected in the lower expected jobs-created number.
The unemployment rate is expected to remain steady at 4.5% and the average workweek is predicted to stay at 33.9 hours. Hourly earnings are forecast to rise 0.3%, compared with growth of 0.2% in November.
"That'll be the next big news to see if we continue to run below trend," says Nolte. "We're going to be on the lookout for any additional strength. That'll set the tone for the early part of the year, and certainly January."