It's a new year, but for now investors are going to stay focused on how well 2003 ended.
January 4, 2004: 11:14 PM EST
By Justin Lahart, CNN/Money Senior Writer
NEW YORK (CNN/Money) - It's a brand new year, but for the next several weeks investors will probably just keep glorying in the old one.
The economy apparently finished out 2003 in high fashion. The December report on manufacturing from the Institute for Supply Management, released Friday, came out far better than forecast and the latest jobless claims report came in at its lowest level in nearly three years. After a slow start, shoppers appear to have made up for lost time in the Christmas week.
Meantime, companies have been remarkably positive. Where typically there are far more firms saying their earnings will fall short of expectations compared with those that say they'll top estimates, for the fourth quarter these negative and positive pre-announcements in the S&P 500 are running neck and neck, according to First Call.
The last time that happened was in the first quarter of 2000, when the market was chugging to its all-time peak. That, and the economy's late-year spurt, suggest that earnings will show much better year-over-year growth even than the 22.4 percent analysts currently forecast.
"The surprises should be on the upside," said Prudential Securities chief investment strategist Ed Yardeni. "It all adds up to very good fourth-quarter numbers."
As it begins to sink in with investors that both the economy and earnings have been growing at a quicker clip than they'd suspected, thinks Yardeni, more buyers will come into the market, sending stocks up.
Contrary to most other forecasters, Yardeni also believes that the Federal Reserve will hike the federal funds rate much more aggressively, taking it from 1 percent to 2 percent. But this will not hurt the market like the tightenings of 1994, he said, because the Fed will make it clear that the point of the hikes is not to stem growth, but because the economy is strong enough to take the funds rate from its extraordinarily low level. By raising rates now, the Fed will have more rate cuts in its pocket for whenever the economy slows again.
"The Fed's going to be raising rates because it realizes that good times will be followed by bad times," said Yardeni. "To have a rate of one percent whenever we have bad times again is simply not prudent."
Make work
The big event of the coming week comes Friday, when the Labor Department releases the December jobs report. Economists expect it to be strong, forecasting a 140,000 jump in payrolls. Bond market participants expect it, if anything, to be even better, given the strength of the employment component of Friday's manufacturing report.
Regardless of how strong the December report is, according to J.P. Morgan Chase economist Jim Glassman, investors can expect to see some big numbers in the month to come.
"It's just a matter of time before we see monthly payroll gains in excess of 200,000," he said. "That's the next stage of the recovery."
Glassman points out that up until the late summer there were still a lot of worries over the economy, and as a result many companies continued to hold off on hiring plans. Now that the recovery seems sure -- and that they've started a new fiscal year -- many companies are ready to start hiring again.
Still it will take time for the unemployment rate to work lower, partly because many disgruntled workers will be back in the hunt, expanding the workforce at a faster pace than usual. By the end of the year, Glassman expects unemployment to fall to 5.5 percent from the current 5.9 percent. The natural rate of unemployment is probably somewhere south of 5 percent, Glassman thinks.
Key events in the week ahead
- Automakers report December sales Monday. Economists surveyed by Briefing.com expect total sales ran at a 13.7 million annual pace, up from 13.4 million in November.
- November construction spending figures, due out Monday, are expected to show a rise of 0.5 percent against a 0.9 percent gain in October.
- November factory orders, slated for Tuesday, are expected to drop by 1.4 percent after jumping 2.2 percent in October.
- The Institute for Supply Management's services index, due out Tuesday, is expected to rise to 60.8 for December, up from 60.1 in November. Any number over 50 indicates expansion in the service-sector economy.
- Wholesale inventories for November, coming out Thursday, are expected to gain 0.5 percent, equal to October's gain.
- The employment report, due out Friday, is expected to show that the economy added 140,000 jobs in December, up from 57,000 in November. The unemployment rate is expected to hold steady at 5.9 percent.
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