It Could Be a Happy New Year for Stocks

Stocks enter a holiday-shortened trading week with respectable returns for 2010 and the major indexes sitting at multiyear highs. Wall Street's average forecast calls for similar returns on the S&P 500 next year, but improving economic conditions at home and abroad, strong corporate profits and the Federal Reserve's easy-money policies have Joe Greco, managing partner at Meridian Equity Partners, even more bullish on equities in 2011.

The blue-chip Dow Jones Industrial Average is up a bit more than 10% for the year-to-date and, at nearly 11,500, is trading at a level last seen in early September 2008.

Stock traders celebrate
Stock traders celebrate

The broader S&P 500 ($INX) has gained 11.6% in 2010 and also stands at a 29-month high. Most impressive, the tech-heavy Nasdaq Composite ($COMPX) is up a robust 16.5% so far in 2010 to put it just shy of a three-year high. After a quiet December, Greco expects the rally to take off again in earnest.

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For the first quarter in particular, we're looking for the market to rally a couple or more percentage points, perhaps in January right out of the gate," Greco says. The V-shaped recovery in corporate profits looks solid well into the third quarter of 2011, and companies are already running so lean that "an uptick in [corporate] revenue growth or any need for greater inventories could spur management to do some hiring," he says.

Naturally, more money in people's pockets is good for the economy, corporations and ultimately stocks. Furthermore, companies are staring to deploy their cash hoards on mergers and acquisitions, dividends and share buybacks, all of which are good for stocks, says Greco. And lest we forget, the Fed is determined to keep pumping liquidity into the financial system.

For more on Greco's outlook from the floor of the New York Stock Exchange (NYX), see the video above.