Wall St Week Ahead: For stocks, recession question to rule 2008
By Jennifer Coogan
NEW YORK, Dec 28 (Reuters) - Wall Street is set to end 2007 with modest gains next week and kick off the new year with all eyes trained on jobs data for signs of recession that could make 2008 a hostile environment for stocks.
Volume will probably be thin on Monday, when New Year's Eve coincides with the final trading day of 2007. The market will be shut for New Year's Day on Tuesday. But Wednesday, Thursday and Friday will be closely watched because the first five trading days of the year tend to mirror the market's performance over the course of the year.
"There will be cash flows that come in right at the beginning of the year that portfolio managers try to get deployed early," said Fred Dickson, market strategist and director of retail research at D.A. Davidson & Co, in Lake Oswego, Oregon. "That may give us a lift, unless they decide to take their time and survey the overall economic landscape."
The financial and consumer discretionary sectors were the two major victims of the subprime mortgage meltdown in 2007. Of the 10 S&P major industry groups, they were the only ones to end the year in negative territory.
Whether the housing market's meltdown and the resulting credit crisis claim any further victims depends on the job market. The U.S. economy maintained low levels of unemployment in 2007, which helped keep consumer spending flowing.
"A lot of people believe we started a recession in December," said Hugh Johnson, chief investment officer of Johnson Illington Advisors. "We'll get a good idea whether that's true or false from the jobs data."
The nonfarm payrolls report, the most closely watched U.S. employment indicator, is set for release on Friday. Economists expect the data to show the economy added 70,000 new jobs in December, compared with 94,000 in November.
The ADP National Employment report, a measure of private-sector employment, is set for release on Thursday. The indicator, which is seen as a preview to the government's payrolls report, is forecast to show a gain of 50,000 jobs in December.
FEWER JOBS VS NASDAQ'S JUMP
Signs of trouble in the job market emerged on Thursday when weekly initial jobless claims rose unexpectedly and the number of longer-term unemployed workers rose to its highest level in more than two years. Another round of weekly jobless claims data is set for release on Thursday.
Investors will scrutinize economic data not only for warning signs of recession, but also to gauge how many more times and by how much the Federal Reserve will cut interest rates.
On Wednesday, the Fed will release the minutes from its Dec. 11 monetary policy meeting, when it cut rates by a quarter-percentage point to help the economy withstand tightening credit conditions and the extended housing slump.
Rate cuts and other measures by the U.S. central bank have helped the stock market stabilize after two dramatic sell-offs in August and November, leaving all three major U.S. stock indexes with gains for the year.
The Nasdaq Composite .IXIC outperformed the other major U.S. benchmarks, rising about 11 percent this year. The blue-chip Dow Jones industrial average .DJI rose about 7 percent. The Standard & Poor's 500 index is up just over 4 percent year-to-date.
In contrast, stocks finished the week in the minus column, with the Dow down about 0.6 percent, the S&P 500 down about 0.4 percent and the Nasdaq down about 0.7 percent.
EXISTING HOME SALES AND ISM DATA
A sparse earnings calendar includes only two S&P 500 components, home goods retailer Bed Bath & Beyond Inc (BBBY.O) and agricultural company Monsanto Co (MON.N).
But stocks could turn on a moment's notice on any unscheduled earnings warnings.
"Any news next week that talks about the earnings of financials and the hits they'll take, that will be much more important to the market," Johnson said. "Or news for the home builders, such as an inventory overhang in existing home sales. More bad news for them means we're farther away from the end of tunnel."
The report on existing home sales in November, set for release on Monday, follows Friday's data that showed sales of new homes fell to the lowest rate since 1995 last month.
Economists surveyed by Reuters predict that U.S. sales of existing homes held steady in November at an annual pace of 4.97 million units, matching October's reading.
But the latest round of economic indicators hasn't been entirely negative. The National Association of Purchasing Management-Chicago's business index, also released on Friday. unexpectedly rose for December.
A similar survey, the Institute for Supply Management manufacturing index, is scheduled for release on Wednesday. Economists forecast a December reading of 50.4. Any number above 50 indicates expansion.
The ISM's service-sector survey, which will be released on Friday, is expected to show a December reading of 53.5.
Rounding out the economic picture for 2007 will be the auto industry's reports on Thursday on U.S. car and truck sales.
"We're hovering right around that breaking point between expansion and contraction," Dickson said. "Sentiment has been really unstable, given the flow of economic news. The next six months will be a turbulent period with investors looking for these diverging forces to begin to stabilize. Until they do, we'll be reluctant to become aggressively bullish on stocks, regardless of Fed action or valuation."
(Wall St Week Ahead runs weekly. Any questions or comments on this column can be e-mailed to: jennifer.coogan(at)reuters.com) (Editing by Jan Paschal)
