Stocks have started the year in choppy waters as investors grow more confident about the strength of the recovery but remain wary of inflation in emerging markets and unemployment in the United States.
At the moment, many professionals expect the first quarter will produce a pullback and the best gains will come later in the year, says Brian Clouse, managing director of institutional equity trading at Wellington West Capital Markets Inc.
"Generally, people are more guarded right now than in the second half of last year in terms of how they deploy their cash," he says. "They are trying to buy [on]pullbacks."
Many advisers are directing clients to large-capitalization companies, especially U.S. blue chips, on the belief that these firms are undervalued opportunities with exposure to international markets. But Mr. Clouse favours small- to medium-caps. Large companies offer greater safety, but the returns won't be nearly as strong as among smaller players, he says.
Mr. Clouse is convinced that the U.S. Federal Reserve's stimulus policy is setting the stage for inflation. Fed chairman Ben Bernanke re-confirmed Friday that the Fed is committed to its $600-billion (U.S.) Treasury bond-buying program, which aims to lower interest rates and boost employment.
Inflation is already evident in emerging markets such as China and Brazil. Any signs that it is taking hold in the U.S. would probably improve the fortunes of Canadian commodity producers, as investors seek a refuge against inflation.
U.S. jobs will not be the catalyst for this recovery - especially not after a report Friday that showed the U.S. economy produced only 103,000 jobs in December, far below the amount necessary to support an expanding work force. The speed of the recovery now hinges on international markets, Mr. Clouse says.
UBS AG economist Larry Hatheway says the fourth-quarter reporting season, which Alcoa Inc. kicks off Monday in North America, could drive stocks higher. Most analysts expect companies to maintain their pattern of solid performance. What could really spur stocks, however, is upbeat guidance as the recovery takes hold.
"Global equities do not look particularly expensive," Mr. Hatheway says. "Partly that reflects residual investor skepticism about the sustainability of the recovery. Partly, it's the legacy of two major bear markets in less than a decade, events which have eroded faith in equities as an asset class. But [it]also reflects the reticence of companies to invest for the future and for growth. Cash hoarding is rarely rewarded by rising multiples."
In Canada, Corus Entertainment, Shaw Communications, Cogeco Cable and Astral Media are scheduled to release quarterly results this week.
U.S. economic data will also propel the markets. On Thursday, the U.S. Commerce Department releases international trade figures for November. The result could weigh on the U.S. dollar as economists expect the trade deficit to widen nearly 6 per cent to $41-billion.
Also on Thursday, the U.S. producer price index will measure the prices of goods and equipment at the producer level for December. The data will provide a good sense of what to expect from the consumer price index for the same period, which is due the next day. Economists expect a substantial monthly jump of 0.4 per cent because of rising energy and food prices, bringing the annual rate up to 1.3 per cent.
Data on U.S. retail sales for December will be released on Friday and are expected to provide insight into the mood of the U.S. consumer. Consensus forecasts are for a monthly rise of 0.8 per cent, matching November's increase.