Dollars and Sense: Wall Street's optimistic new year outlook

Strong year. The year ended strong in the stock markets. The Dow Jones Industrial Average was up more than 26 percent for the year. The S&P 500 saw a rise of 29 percent for the year. But it was the tech-heavy Nasdaq that took the prize. It was up a whopping 38 percent for the year.

Will it continue? I’m fond of quoting Yogi Berra when it comes to making predictions. He said predictions are dangerous, especially predictions about the future. But consumer confidence, which is measured by the Conference Board, hit its highest level in 18 months this week, so most analysts expect this bull market to continue at least for a while into the new year. The Conference Board’s Lynn Franco says consumers are feeling pretty positive, and she expects that positive vibe to continue into the new year.

More positive indicators. More evidence that the U.S. economy is doing pretty well came from the purchasing managers manufacturing index. It posted a number higher than expected this week. Yesterday, new claims for unemployment dropped slightly. In Asia, Japan's Nikkei climbed nearly a percent to its highest close in more than six years. According to housing data website Zillow, home values in November were 7.1 percent higher than a year ago. Zillow also said that 88 percent of metro areas in the United States experienced home value appreciation. All this is good news.

So what’s the bad news? The Federal Reserve will begin tapering its bond purchases this month. It’s still going to be pouring $75 billion a month into the markets, so that cash will likely still fuel the markets, but you do reach a point at which the amount of total bond purchases in the market swamp the economy’s ability to unwind. Most analysts don’t think we are there yet but the truth is that we’re in uncharted territory.

Offshore. A year ago we spent a lot of time talking about Europe and China, and it was almost all bad news. Will we be hearing from the overseas markets in the year ahead? I think we will. We got a taste of that this week when China announced data showing slowing manufacturing activity. The Dow dropped more than 100 points that day. If China slows down appreciably in the year ahead, it will definitely have an impact on U.S. growth.

The week ahead. On Tuesday, we’ll get a report on international trade for November. That report is pretty closely watched because it speaks directly to the issue we just mentioned: How are things in Europe, China, and the rest of the world? We normally get the unemployment report on the first Friday of the month, that would have been today, but because of the holiday we’ll get that report next Friday. It’s usually the most important report of the month, and it will remain so until unemployment falls to levels more in line with historical norms.