The coming week promises to be the busiest before the year end. The Fed meets Tuesday though it is not expected to take any action. There is also a series of important economic reports, including November's retail sales data Tuesday, weekly jobless claims Thursday and producer and consumer inflation data Thursday and Friday.
I think you'll know a lot by Tuesday and Wednesday on the true reaction to Europe. We had a better rally here, but most of the European markets didn't get back most of their losses (from Thursday's selloff). That makes me a little suspicious, One of the concerns is that Standard and Poor's or other rating agencies could downgrade some of Europe's sovereigns.
The Dow jumped 1.6 percent Friday, giving it a 1.4 percent gain for the week to 12,184. The S&P 500 was up 0.9 percent for the week, finishing at 1255.19. The S&P is basically flat for the year-to-date, down 0.19 percent. The Dow, meanwhile has gained 5.2 percent for the year.
Whither Stocks
Larry Kantor, Barclays Capital head of research, said he believes the U.S. market has decoupled from global equities markets. While the key U.S. indices are holding their own after months of volatility, most stock markets around the world show big losses. For instance, German stocks are down 13.4 percent for the year so far; Brazil is down 16 percent; Shanghai is down 17.6 percent; Australia is down 12 and Japan is down 16.6 percent.
"I think the U.S. data getting better will help the U.S. stock market. I think the better data in the U.S. has a little more legs. Coming into the fourth quarter, we saw a big drop in inventories in the third quarter. Relative to sales, inventories looked really low. That means you're going to get some production and that's going to help GDP," said Kantor.
Kantor said even though European leaders disappointed some in the markets, it is actually a big step that the leaders were willing to give up some individual sovereignty. "Is this still going to be an issue? Absolutely. They haven't resolved the issue, but they have taken a significant step forward," he said.
Bill Stone, chief investment strategist for PNC Wealth Management and PNC Institutional Investments, said if markets are convinced the situation in Europe has stabilized, there should be a rally into the year end, as fund managers adjust their portfolios. "Our thinking on the EU decision has been that we expected this kind of two steps forward, one step back. We haven't gotten two steps in a while. It was more of a 1-1/4 step forward and one step back. I do believe we got our full two steps at this summit," he said, "It lays the foundation for a durable solution rather than these 'throw the money up against the wall and see what sticks' kind of solution."
"You can put together a pretty nice rally. I think valuations leave us a lot of room ... but on the other hand, we had a massive rally last week, and another rally this week. How much has already been paid for," he said. But while Stone and others see a possible "Santa" rally, they don't have lofty hopes for 2012. Stone expects the S&P 500 to finish next year at 1350, and Barclays this week announced a target of 1330 for the S&P for 2012.
Kantor said while he thinks stocks can go higher near term, there might be some disappointment around the Congressional discussions on the proposed extension of the payroll tax holiday. Wall Street is watching that subject carefully since the payroll tax cut could take away as much as a point from next year's GDP if it is not extended, according to some economists. "I think the data could keep being good. I think the payroll tax could offset it even if it passes because of all the rhetoric," he said.
Fed Ahead
The Fed is not expected to take any action at its one day meeting Tuesday, but Jim Caron, global head of interest rate strategy at Morgan Stanley, believes it will lay the ground work for a change in communication policy in January.
"Effectively, what they're having is diminishing returns in terms of quantitative easing [cnbc explains] . You had QE1 that affected asset prices; QE2 prevented deflation, and you now have "operation twist," and the jury is still out," he said. The "QE" or quantitative easing programs involved the Fed's purchase of assets, which increased the size of its balance sheet. "Operation twist" is a program under which the Fed is purchasing longer duration Treasurys and selling the short end, without any change in the size of its balance sheet.
Caron said by changing its communications strategy, the Fed believes it could affect market behavior. "The change would be an attempt to reflate asset prices while reducing risk premiums in order do achieve easier financial conditions," he notes.
The Fed, when it does move to change its communication strategy, could, for instance, emphasize that it expects to keep the Fed funds rate at zero for the next two years and add language that says what it would consider in order to change that.
The Fed would expect the markets to respond to that by reflating asset prices, like stocks, knowing the Fed is on hold. "That will effectively allow the markets to understand that they are going to stay easing longer, until they get what they want, which is an improvement in financial conditions," said Caron.
Caron expects the Fed to eventually announce another round of quantitative easing, which would involve the purchase of mortgage securities sometime at the end of the first quarter or beginning of the second quarter.
Zane Brown, head of fixed income strategy at Lord Abbett, also does not expect the Fed to take any action Tuesday, but he also expects it to move toward increased transparency later on. He said this week he will continue watching Europe and U.S. data, including the retail sales for November and jobless claims.
In the past week, jobless claims were reported at 381,000, the lowest level since February. Other data was also positive in the past week, including a surprising improvement in consumer sentiment to its highest level in six months. Trade data also improved in the past week encouraging Goldman Sachs to raise its fourth-quarter GDP forecast to 3.4 percent.
"People have been excited recently about hopes that the employment picture is starting to improve ever slightly ... even the weekly claims number will be a focal point. Also retail sales will continue to indicate whether or not consumers will spend. There's concern that they've spent to the point where savings rates have declined to 3.5 percent ... over the past three years it been between 4 and 6 percent," Brown said.
"But that could suggest people are less concerned about losing their jobs," he said.
What Else to Watch
OPEC meets in Vienna Wednesday, and analysts do not believe it will agree to a new quota this week. The meeting comes six months after its last meeting dissolved with Saudi Arabia losing a proposal for an increase in output to make up for lost Libyan supply. Saudi Arabia declared it would pump more.
Former MF Global CEO Jon Corzine will testify again before Congressional committees Tuesday and Thursday.
Monday
0100 pm $32 billion 3-year note auction
0200 pm Federal budget
Tuesday
Earnings: Best Buy, FactSet
0730 am NFIB small business survey
0830 am Retail sales (Nov)
1000 am Business inventories
1000 am JOLTS survey
0100 pm $21 billion reopened 10-year note auction
0215 pm FOMC decision
Wednesday
OPEC meets in Vienna
Earnings: Joy Global, Verifone
0830 am Import prices (Nov)
0100 pm $13 billion reopened 30-year bond auction
0830 am Atlanta Fed President Dennis Lockhart speaks in Atlanta
Thursday
Earnings: FedEx, Research in Motion, Discover Financial, Pier One, Rite Aid, Adobe Systems, Accenture
0830 am Initial jobless claims
0830 am PPI
0830 am Empire State survey
0830 am Q3 Current account
0900 am TIC data
1000 am Philadelphia Fed survey
0100 pm $12 billion 5-year TIPS auction
0320 pm Atlanta Fed's Lockhart speaks in Atlanta
0430 pm Fed balance sheet
0430 pm Money supply
Friday
0830 am CPI
1200 pm Dallas Fed President Richard Fisher speaks on the economy in Austin, Texas
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