Wall Street is set to 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.
The market will be shut today, New Year's Day. But tomorrow, Thursday and Friday will be closely watched because the first five trading days 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 last year. 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 US economy maintained low levels of unemployment last year, which helped keep consumer spending flowing.
"A lot of people believe we started a recession last month," said Hugh Johnson, chief investment officer of Johnson Illington Advisers. "We'll get a good idea whether that's true or false from the jobs data."
The non-farm payrolls report, the most closely watched US employment indicator, is set for release on Friday. Economists expect the data to show the economy added 70,000 new jobs last month, 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 last month.
Signs of trouble in the job market emerged 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 scrutinise 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.
Tomorrow, the Fed will release the minutes from its December 11 monetary policy meeting, when it cut rates a quarter-percentage point to help the economy withstand tightening credit conditions and the extended housing slump.
Rate cuts and other measures by the US central bank have helped the stock market stabilise after two dramatic sell-offs in August and November, leaving all three major US stock indexes with gains for the year.
The Nasdaq Composite outperformed the other major US benchmarks, rising about 11 per cent this year. The blue-chip Dow Jones industrial average rose about seven per cent. The Standard & Poor's 500 index is up just over four per cent year-to-date.
In contrast, stocks finished the week in the minus column, with the Dow down about 0.6 per cent, the S&P 500 about 0.4 per cent lower and the Nasdaq off about 0.7 per cent.