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U.S. Stocks To Start Out The Year With A Bang!...

By Leslie Wines & Ciara Linnane, MarketWatch
Last Update: 7:04 AM ET Dec 30, 2006

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NEW YORK (MarketWatch) - U.S. stocks are expected to ring in the New Year with gains, extending the rise seen in the final week of 2006 on growing conviction that the economic slowdown will be moderate and equities will enjoy a favorable environment.

The coming week will feature just three trading sessions, as U.S. equities markets will be shut on Monday for the New Year's Day holiday and on Tuesday for a national day of mourning for former President Gerald R. Ford, who died in the past week at age 93.

The four-day market close will mark the longest stretch in which U.S. equities have not traded since the September 11, 2001 attacks, when the market was shut for six days.

"The market is poised to move higher in the new year," said Kevin Kruszenski, head of trading at KeyBanc Capital.

In recent months there were concerns about a hard landing for the economy in 2007, but the market's psychology has turned more positive after stronger recent reports. In the first week of the year, "We'll be looking for more signs that the economy is still growing," Kruszenski said.

Key data reports due next week will include the minutes from the December Federal Open Market Committee meeting on Wednesday. The minutes were to have been released on Tuesday, but the Federal Reserve also will close Tuesday to mark Ford's passing.

Investors will scrutinize the FOMC members' thoughts on economic strength and the pace of inflation for clues on the economic policy outlook.

Perhaps the most influential report of the week will be the December unemployment report, due out on Friday. Investors will be eager to gauge the health of the labor market and the pace of wage inflation, which is carefully monitored by the Fed in making rate decisions.

Kruszenski said market momentum in early 2007 also should be bolstered by consolidation activity. "Companies still have a lot of cash on their balance sheets and there's a strong trend of M&A, and I don't see that changing in 2007," he said.

"That being said, the interest rate market had begun to discount rate cuts by the Fed based on a slowing economy, but now that we haven't seen any signs of a collapse, there could be some backlash on interest-rate sensitive stocks," such as financials and mortgage brokers, Kruszenski said.

Michael Malone, a trading analyst at Cowen & Co, said benign price pressure also should benefit the market as it kicks of the year.

"Other economic data suggest that inflation remains benign, keeping long-term rates low and helping support housing, which has been the biggest overhang for the market," he said.

This should help support the market, at least in the early goings of 2007, even after the uninterrupted rally seen over the past six months, Malone added. "One can certainly expect the trend remains up," he said.

A solid 2006:

The U.S. stock market ended 2006 on a bright note, with all three major indexes posting their best performance in three years. The Dow Jones Industrial Average ($INDU) stood at 12,463 at the close of trading on Friday, marking a 16.3% gain for the year.

The S&P 500 index ($SPX) gained 13.6% for the year and the Nasdaq Composite (COMP) advanced 9.5%.

General Motors Corp. (GM), which lost half of its value in 2005 as investors feared the automobile giant might go bankrupt, was among the best performing blue-chip stocks in 2006, rising 58.2%

AT&T Corp. (T) was the second-best performing stock on the Dow, gaining 46%, as investors applauded its plans to merge with BellSouth Corp. (BLS).

Intel (INTC) was the worst performer with an 18% loss.

Economic spotlight:

Economists surveyed by MarketWatch are expecting the December non-farm payroll report to show the economy added 120,000 jobs in the month, down from the 132,000 added in November.

The report will be released at 8.30 a.m. Eastern on Friday.

"The job market is getting a little weaker," said Bill Cheney, chief economist for John Hancock Financial Services. But the weakness isn't sufficient, he said in an interview, to force the Fed to act on monetary policy.

The nation's jobless rate is expected to stay put at 4.5%. It reached 4.5% in November after hitting a five-year low of 4.4% in October.

Average hourly earnings are expected to rise slightly, up by 0.4% compared to a gain of 0.2% in November. And the Labor Department's data on the average workweek are expected to show a fractional increase, to 34 hours from 33.9 hours in November.

The jobless rate, hourly earnings and average workweek are reported at the same time as payrolls.

Also on Friday, Fed Chairman Ben Bernanke is scheduled to speak at a conference in Chicago about central banking and bank supervision in the U.S., at 1:45 p.m. Eastern time.

On Wednesday, investors will scrutinize the Institute for Supply Management's factory index, expected to fall to 49% from 49.5%. A reading below 50% signals contraction.

Leslie Wines is a reporter for MarketWatch in New York.
Ciara Linnane is markets editor for MarketWatch in New York.