U.S. equities climbed higher on Wednesday in another session of relatively quiet trading. Although the gains were modest, it was enough to push large-caps to fresh 2016 highs and push the Dow Jones Industrial Average over the 18,000 level on a closing basis for the first time since April.
Once again, there was no specific catalyst for the move; only a continuation of the slow-burn, short-covering melt up of the last few weeks that have capped a three-month consolidation pattern that has capped a three-year sideways crawl for stocks.
In the end, the Dow gained 0.4%, the S&P 500 gained 0.3%, the Nasdaq Composite gained 0.3% and the Russell 2000 finished the day with a 0.8% gain. Treasury bonds were stronger, the dollar was weaker, gold rallied 1.3%, and crude oil gained 1.7% on another inventory draw and ongoing focus on Nigerian supply disruptions.
Industrial stocks led the way, rising 0.7% as a group, followed by materials, up 0.6%. Energy names were the laggards, down 0.2%, after a standout performance on Tuesday. AK Steel Holding Corporation (NYSE:AKS) gained 16.8% thanks to an upgrade by analysts at Credit Suisse citing price hikes on stainless products and cost-side improvements.
But one gets the feeling that a breakout of volatility is on the verge of breaking out. On the upside, crude oil remains strong as investor confidence swells equity valuations. That’s pushed the major averages to within a percentage points of fresh all-time highs.
Yet major hurdles loom as well including an ongoing earnings recession, the specter of fresh interest rate hikes, and a contentious U.S. presidential election as potential drags. Plus the fact that, on a number of valuation metrics, stocks have never been more expensive.
Moreover, trading over the past week has been driven by the belief that Friday’s disappointing payroll report has effectively tabled any chance of a Federal Reserve interest rate hike in June or July. But today’s Job Openings and Labor Turnover Survey was strong, suggesting the hiring slowdown is more about a lack of qualified and willing workers rather than fewer positions needing to be filled.
Job openings rose to 5.788 million for the month, beating the 5.67 million consensus estimate. The job openings rate rose to a new post-recession high of 3.9%.
If so, we should see wage inflation — and thus overall inflation — start to accelerate. That could pressure the Fed to tighten policy to stay ahead of inflation, strengthen the dollar, weaken commodities including energy, and deepen the drag on corporate earnings.
We’ll know more when the Fed releases its next policy statement and updates its economic projections and rate hike forecast next Wednesday.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.
