Investors in U.S. stocks will be looking to Washington next week, awaiting key jobs data and minutes from the Federal Reserve's most recent meeting, when it decided to cut its unprecedented monetary stimulus.
Minutes from the Fed's December 17-18 meeting, when the central bank announced its plan to reduce monthly asset purchases by $10 billion to $75 billion, could give further insight into the reasons behind the decision and offer clues about how quickly the Fed will wind down the stimulus.
Stocks rallied following the decision because it confirmed to many that the U.S. economy was on firmer footing and ended uncertainty over when the Fed would finally reduce its stimulus, which was the key driver of the S&P 500's nearly 30 percent gain last year.
Recent data, including Thursday's factory activity report, confirmed underlying strength in the economy, suggesting the Fed was justified in its move.
But investors will be anxious to see whether that strength is also seen in the December U.S. payrolls report, due on Friday. The Fed has tied its policy in part to jobs data. In its December announcement said it "likely will be appropriate" to keep overnight rates near zero "well past the time" that the U.S. jobless rate falls below 6.5 percent.
"The expectation is we're going to hear things are good, otherwise why would they have tapered," said Rex Macey, chief investment officer of Wilmington Trust Investment Advisors, based in Wilmington, Delaware.
U.S. employers are expected to have added 197,000 jobs in December, down slightly from the 203,000 jobs added in November, according to a Reuters survey. The unemployment rate is expected to remain at a five-year low of 7.0 percent.
The Fed's decision to trim its stimulus in December came as a surprise to many investors, who had expected the Fed to delay such a decision until early in 2014.
Signs of weakness in economic data could suggest that the Fed acted too soon and give investors reasons to sell, especially as last year's huge rally left investors braced for a period of consolidation.
Stocks ended with slight losses for the week, with the Standard & Poor's 500 index down 0.6 percent.
Besides the payrolls data on Friday, next week brings a report on the U.S. services sector on Monday as well as a report on durable goods orders.
"I think the equity markets borrowed a bit out of 2014 in terms of sniffing out better growth, and now if there is some concern that it may not be fulfilled, then that might be an impetus for investors to cool their enthusiasm," said Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia, which manages about $60 billion in assets.
To be sure, Ben Bernanke, in his last speech as Fed chairman on Friday, said the central bank is no less committed to highly accommodative policy now that it has trimmed its stimulus. In order to help the economy recover from its 2007-2009 recession, the Fed has held interest rates near zero since late 2008.
Bernanke is set to be succeeded by Fed Vice Chair Janet Yellen when he steps down at the end of this month. Yellen is expected to get U.S. Senate approval sometime next week, while minutes from the last Fed meeting will be released Wednesday.
ALCOA RESULTS DUE
Investors also will be keeping an eye on the first results from the upcoming earnings season for signs of how well they are holding up compared to expectations. Results from Alcoa Inc (AA.N) and Monsanto Co (MON.N) are both due next week.
The pace of companies reporting isn't expected to pick up until the following week, when a number of banks are due to report, including JPMorgan Chase & Co (JPM.N).
Fourth-quarter results are expected to have increased 7.6 percent from a year ago, according to Thomson Reuters data. That compares with earnings growth of 6 percent in the third quarter. Those results are likely to help determine whether earnings forecasts for 2014 need to come down and whether stock values have become overstretched.
"If you have earnings growth and the economy is better, then stocks can go up," said John Fox, director of research at Fenimore Asset Management in Cobleskill, New York.
Some focus may turn to retailers as companies report holiday same-store sales in coming days and ahead of the consumer and retail ICR XChange conference January 13-15.
Goldman Sachs analysts recommended buying options in companies including Wendy's WEN.N and GameStop (GME.N) heading into the events.