US stocks enter 2011 at two-year highs, facing a crucial reading this week on the health of the US economy: the monthly unemployment and job creation data.
“From all indications available, the year should begin well,” Gregori Volokhine at Meeschaert Capital Markets said.
“There are real signs that monetary policy and fiscal policy are having an effect on the economy,” the analyst said. “There’s a wave of optimism which began in the markets several months ago and which now is being reinforced by macroeconomic numbers.”
Over the past week, the Dow Jones Industrial Average barely budged, slipping 0.03 percent to close Friday at 11,577.51 points. The tech-rich NASDAQ dropped 0.48 percent to 2,652.87 points, while the Standard & Poor’s 500 index, a broad measure of the market, added 0.07 percent to 1,257.64 points.
The blue-chip Dow index, which gained 11.02 percent last year, added more than 5 percent last month alone. On Wednesday it finished at its highest level since August 2008.
“Investors will probably look back on this December as one to remember,” Frederic Dickson at DA Davidson & Co said.
“Big year-end rallies often fizzle out shortly after the beginning of a new calendar year,” Dickson said. “While we believe the economic landscape will continue to support higher stock prices in 2011, the market now appears technically extended from a longer-term perspective.”
The final week of last year was marked by extremely thin volumes. Traditionally quiet because of the holidays, this year’s lull was even deeper after a blizzard along the East Coast kept many traders away from their offices.
Trading sessions were listless and final results were weak.
The Dow, for example, slipped 0.14 percent on Thursday, despite three positive US economic indicators: new claims for jobless insurance benefits fell to their lowest level in two-and-a-half years last week, pending home sales unexpectedly rose in November, and the Chicago ISM index showed manufacturing activity at its fastest pace in more than 20 years.
“A lot of investors are waiting for the new year to see what the December employment report looks like and to wait until the fourth-quarter earnings reports start to be released,” Hugh Johnson of Hugh Johnson Advisors said.
Stocks face a calendar crammed with economic releases, capped on Friday by the closely watched US unemployment and job creation report. The labor data in previous months has been grim, leaving the unemployment rate near 10 percent as the economy struggles to recover from recession.
“That’s going to be the test,” Volokhine said. “This number needs to confirm that the jobs market is improving.”
Among other economic numbers slated are construction spending and the ISM manufacturing index tomorrow, industrial orders on Tuesday and the ISM services index on Wednesday.
The US Federal Reserve is set to publish the minutes of its last policy-setting meeting on Tuesday.
“With low interest rates, improving economic data and healthy projected earnings growth, the outlook for 2011 is relatively bullish,” Briefing.com analysts said in a client note. “Although broad market valuation remains reasonable, with stocks at two-year highs, sentiment near a bullish extreme and several macro risks still in the picture, it may be a bumpy ride again in 2011.”
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