UPDATE 1-Wall St Week Ahead: U.S. stocks set for a down year?

(Updates with Chinese protest of U.S. arms sale to Taiwan)

By Edward Krudy

NEW YORK, Jan 31 (BestGrowthStock) – The adage “as January goes, so
goes the year” bodes ill for equity investors after the S&P 500
closed out its worst month in almost a year. This week, they
will have to contend with fears of sovereign defaults and
potential unpleasantness in the U.S. labor market as well.

U.S. corporations have so far handily beat analysts’
earnings forecasts. With heavyweights like Exxon Mobil Corp
(XOM.N: ) and United Parcel Service Inc (UPS.N: ) set to report
this week, investors will be looking for that to continue,
going some way to offset the perception that political risk is
on the rise.

Still, China’s protest over the weekend of a $6.4 billion
U.S. arms sale to Taiwan is yet another political bump in the
road for investors. China said it would impose unspecified
sanctions on any companies involved in the deal. For details
see [ID:nTOE60U003] and [ID:nN30152939]

Politics have played the biggest role in tripping up
indexes this year. The Standard & Poor’s 500 Index (.SPX: ) fell
3.7 percent in January and is off nearly 7 percent from its
high this month. Currently, investors are worried that Greece’s
debt troubles may herald a wave of sovereign defaults in the
euro zone that could derail an economic recovery.

“There’s a lot of concerns going on as far as the sovereign
debt is concerned in a lot of the nations, specifically in the
euro zone,” said David Lutz, managing director of trading at
Stifel Nicolaus Capital Markets in Baltimore.

A heavy week for economic data will culminate in Friday’s
nonfarm payrolls report. [ECI/US] Analysts believe the economy
added 5,000 jobs in January, according to a Reuters poll.
Another negative surprise after the previous month’s unexpected
surge in job losses could roil markets.

“The next headline is going to be this unemployment data
that is coming out, and there is no indication it is going to
be moving in the direction in which we want it to move,” said
Jonathan Corpina, senior managing partner of Meridian Equity
Partners in New York.

Friday’s jobs number will be presaged by the ADP
private-sector jobs report on Wednesday.

WILL MORE EARNINGS BEATS HELP?

Around 500 U.S. companies have reported quarterly earnings
so far and of those, 73 percent have beaten earnings estimates,
exceeding the 68 percent that beat in the last two quarters,
according to data from Bespoke Investment Group.

But that positive earnings picture has not translated into
gains for the stock market this time around.

Bespoke Investment Group’s data shows the average stock of
a company whose earnings beat estimates gained only 0.8
percent, compared with a 2.9 percent drop in those that
missed.

“The companies beating aren’t being rewarded by nearly as
much as the companies that miss are being punished,” Bespoke
Investment said in its research note.

After consecutive quarters when better-than-expected
earnings helped drive stocks up more than 66 percent from last
year’s lows, fourth-quarter numbers may have already been
factored into the market.

Highlights in the second full week of the earnings season
will include Exxon Mobil on Monday, which is the first of a
number of energy companies reporting results, as well as
delivery service UPS on Tuesday. UPS, viewed as a window on the
economy’s health, raised its profit forecast earlier this
month.

Exxon is expected to post earnings per share of $1.19,
while UPS is seen reporting 73 cents per share.

EYES ON THE ECONOMY

The U.S. economy grew at its fastest pace in more than six
years in the fourth quarter of 2009, expanding at an annual
pace of 5.7 percent — much more than most economists had
expected. [ID:nN28246399]

There will be an early indication of the sustainability of
growth on Monday, when the Institute for Supply Management
releases its manufacturing report for January. Economists in a
Reuters poll are expecting a reading of 55.2, showing an
expanding sector for the sixth straight month.

That will be followed by the ISM’s service-sector survey on
Wednesday, expected to edge into growth mode after the largest
segment of the U.S. economy struggled to find its footing in
the fourth quarter of last year.

“The economy is showing no signs of a self-sustaining
recovery,” said David Wright, portfolio manager at Sierra Core
Retirement Fund in Santa Monica.

“Essentially the fuel was used in sustaining the rally as
far as it did, and we are now beginning a down cycle that I
expect to be prolonged and severe.”

For the past week, the S&P 500 slid 1.7 percent, while the
Dow Jones industrial average (.DJI: ) shed 1.1 percent and the
Nasdaq Composite Index (.IXIC: ) fell 2.6 percent.

For the month of January, the blue-chip Dow average dropped
3.5 percent — close to the S&P 500’s 3.7 percent decline —
and the Nasdaq lost 5.4 percent.

If this January is anything to go by — and the Stock
Trader’s Almanac shows only six major occasions since 1950 when
January’s performance has not been an indicator for the rest of
the year — Wright’s prediction may come true.
(The Wall St Week Ahead column appears every Sunday. Comments
or questions on this one can be e-mailed to
edward.krudy(at)thomsonreuters.com)

Investing Tools

(Reporting by Edward Krudy; Additional reporting by Chuck
Mikolajczak and Ellis Mnyandu; Editing by Jan Paschal and
Maureen Bavdek)

UPDATE 1-Wall St Week Ahead: U.S. stocks (Read more about the stock market today. ) set for a down year?