NEW YORK (
) -- Light trading can be expected in the holiday-shortened week ahead, as investors prepare for the post-recession market in 2010.
The stock market has recently seen weak volume and traded in a narrow range, with more action in the currency and commodity markets. The dollar has strengthened due to growing concerns about sovereign debt and stronger-than-expected economic reports. Traders now expect the
to begin lifting interest rates sooner than they did a few months ago, which has also helped push the dollar higher.
Robert Pavlik, chief market strategist at Banyan Partners, notes that telecom and utilities have gained significant ground, outperforming other "leading sectors" like technology and materials. He believes the trend is due to hedge funds, mutual funds and portfolio managers shifting into defensive, low-risk plays to maintain year-end performance targets. But he doesn't expect the trend to last long.
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"A decision to stay invested in these lower growth areas would most certainly result in underperformance which few funds would be able to justify to their clients," Pavlik says.
He believes the positions will be reversed in early 2010, as increasing proof of an economic recovery pushes investors into materials, industrial, technology, consumer discretionary and financial stocks.
The market finished strong on Friday, on the back of several bullish developments.
agreed to buy
in a $41 billion deal, as the energy major made a big bet in the natural gas space. On late Thursday, tech stalwarts
Research In Motion
reported better-than-expected earnings, expressing bullish sentiments for the coming year.
The only company reporting earnings next week is
on Monday, though there are quite a few important economic data releases. Third-quarter gross domestic product data will be released on Tuesday, along with existing home sales for November. New home sales, as well as personal income and spending and consumer sentiment will be released on Wednesday, followed by initial jobless claims and durable goods data on Thursday.
The market closes early on Thursday, which is Christmas Eve, and is closed on Friday for Christmas.
Yet, as investors close out the last couple weeks of 2009, experts are forecasting strong results ahead. At a
Bank of America-Merrill Lynch
conference on Monday to review predictions for 2010, analysts gave the impression that opportunities would abound.
Ethan Harris, who leads the economics team, predicts 4.4% global GDP growth and 3.2% growth for the U.S. next year. Top equity strategist Michael Hartnett suggests that stimulus packages and helpful monetary policy provide a bullish case for stocks next year. BofA-Merrill is particularly bullish on European, Asian and emerging markets stocks, but bearish on the U.S., due to the potential for policy missteps.
"The G20 recently pledged to keep fiscal stimulus programs, which is no surprise given the number of unemployed voters," Hartnett says. "Central banks will a least initially continue to pump liquidity into the financial system in 2010."
However, he considers a correction to be "inevitable" at some point in 2010. Whether it will provide a buying opportunity depends on the strength of U.S. consumers and Chinese producers.
As far as next week goes, Justin Golden, a strategist at Macro Risk Advisors, expects the dollar rally to continue as worries persist about the sovereign debt markets for other countries abroad. While Dubai's near-default was resolved, a downgrade of Greece's sovereign debt this week, combined with fears about other weak fiscal links in the EU, like Spain and Austria, have caused investors to return to the greenback for security.
Golden believes that the stock market will largely follow the lead of Fed monetary policy. The Fed still has rates at a near-zero level, and has reiterated its promise to keep them low for an extended period. The outlook is unlikely to change until the job market picks up in 2010.
"Equities could continue to kind of drive higher, as investors are forced into taking more risk," says Golden. "Interest rates are zero, or 25 basis points, so if you want any return on your money, you're kind of forced to take more risk until the Fed tells us otherwise."
-- Written by Lauren Tara LaCapra in New York