U.S. stocks closed out 2009 with the best performance in six years, but monthly employment figures in the first week of the new year will keep investors focused on what is likely to be 2010's reality -- the economy's struggle to recover.

On the data front, the main event will be Friday's report from the Labor Department on U.S. non-farm payrolls in December. Economists polled by Reuters have forecast that payrolls shed 20,000 jobs in the final month of 2009, compared with just 11,000 lost in November.

The Institute for Supply Management's report on manufacturing, due on Monday, is expected to show the ailing sector was still slow to expand in December, while a projected drop in November pending home sales, due on Tuesday, will underscore the housing market's shaky recovery.

Major factors in the stock market's 2009 rally have been ultra-low interest rates and the Federal Reserve's purchases of securities. A repeat of November's much better-than-expected unemployment report could cause investors to worry that the Fed will increase borrowing costs sooner than previously thought.

Thomas Wilson, managing director of institutional investments at Brinker Capital in Berwyn, Pennsylvania, said the unwinding of the fiscal and monetary stimulus, possibly in the second half of 2010, will be a delicate and deliberate process that could ruffle markets.

Expectations that interest rates may rise sooner than expected have been helping the U.S. dollar recently, which could make a sustained move higher -- if expectations for higher rates increase further.

The stock market moved inversely to the dollar through most of 2009. A continued bounce in the greenback in 2010 could hurt stocks.

The market's reaction to the generally stronger dollar is going to dictate a lot of the investment themes for the first half of 2010 and maybe the year at large, said Bruce Zaro, chief technical strategist at Delta Global Advisors in Boston.

A TURNAROUND YEAR

Despite a 65 percent gain in the S&P 500 from its 12-year closing low in early March, stock investors have lost money this decade when total returns are taken into account. Few will be overwhelmed with the long-term performance of their portfolios.

As 2009 ended, Wall Street capped its first-ever negative decade on a total return basis, even with dividends reinvested.

Nevertheless, investors will remember 2009 as the year that the U.S. stock market made a substantial turnaround from its plunge in 2008 when fallout from the implosion of subprime mortgages and the credit crisis forced Lehman Brothers into bankruptcy -- changing the landscape of Wall Street forever.

For 2009, the Dow Jones industrial average <.DJI> climbed 18.8 percent, the S&P 500 <.SPX> shot up 23.5 percent and the Nasdaq <.IXIC> surged 43.9 percent.

JOBS, RATES AND HOUSING

Friday's non-farm payroll report is expected to confirm that U.S. job losses continued to bottom out in December. The data is also likely to reinforce expectations that the U.S. unemployment rate will peak in the first half of next year.

The unemployment rate is expected to edge up to 10.1 percent in December after it unexpectedly fell to 10 percent the month before.

In December, the Fed stuck to its commitment to keep interest rates close to zero for an extended period. Some investors took November's unemployment number as a sign that rates may need to rise faster. That debate could start again if Friday's number is better than expected.

Better economic data will raise concerns about the possibility the Fed will tighten earlier than most investors anticipate, but given what we're hearing from the Federal Reserve, it seems unlikely, said Carmine Grigoli, chief U.S. investment strategist at Mizuho Securities in New York.

Most economists polled by Reuters said they do not expect the Fed to raise interest rates before the end of the first quarter of 2011.

Many analysts are expecting the fledgling recovery in the U.S. housing market to be bumpy. An index of pending home sales is seen dropping 2.1 percent in November after hitting a 3-1/2-year high the month before -- the culmination of nine straight months of gains. That data is due on Tuesday.

The housing recovery is being supported by an $8,000 tax credit for the first-time home buyer. Originally due to expire at the end of November, it was extended to the end of April. The possible removal of that support remains a wild card for financial markets.

If the tax credit does not get extended again, that will certainly be a negative on the housing front, plus if we see mortgage rates rising as well in 2010, a combination of those two would be a negative for the housing market, Wilson said.

Mortgage rates generally follow the yield on the 10-year U.S. Treasury note, which rose to 3.8 percent on Thursday, the last day of 2009, from 3.2 percent at the end of November. So far, stock investors have looked past that as they focus on signs of an improving economy.

ISM DATA AND CAR SALES

On Monday, the ISM's manufacturing index could have the potential to surprise on the upside after the ISM-Chicago regional survey showed manufacturing in the U.S. Midwest expanded more than expected in December.

Economists polled by Reuters expect the ISM's manufacturing index to rise to 54 in December after edging lower to 53.6 in November. A reading over 50 indicates economic expansion.

The equity market is going to continue to focus on improving economic prospects, assuming that the economic data next week continues along the path that we've seen, Grigoli said.

Two days later, on Wednesday, the ISM's snapshot of the U.S. services sector, which is the largest segment of the U.S. economy, will be released.

The Reuters forecast for the ISM non-manufacturing index calls for an increase in December to 50.0, which signals expansion, from November's reading of 48.7.

As for the nation's gross domestic product, which measures the economy in terms of all goods and services produced within U.S. borders, economists polled by Reuters expect that GDP will grow at an annual rate of 2.8 percent in 2010. The U.S. economy returned to growth in the third quarter of 2009 following a prolonged slump tied to a recession that began in December 2007.

Factory orders are pegged to rise 0.5 percent in November when the data is released on Tuesday. Better-than-expected data in October showed inventories at U.S. factories increased for the first time in more than a year -- a sign that manufacturers are ramping up production.

Reports on December sales from U.S. auto makers, also due out on Tuesday, will give yet another reading on the economy and manufacturing. Total vehicle sales are expected to rise to 11 million units in December after edging up last month.

(Reporting by Edward Krudy, with additional reporting by Leah Schnurr; Editing by Jan Paschal)

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