Large-cap stocks inched to new record highs on Thursday as optimism over the results of the mid-term elections on Tuesday remains the dominant emotion. We’ll see how long that lasts when Congressional leaders meet with President Obama at the White House on Friday given comments from both sides suggesting partisan rancor and acrimony will remain the default operating strategy in Washington.
In the end, the Dow Jones Industrial Average gained 0.4% to close above 17,500 for the first time ever, and the S&P 500, Nasdaq Composite and Russell 2000 all gained 0.4%.
Commodities were weak once again as the U.S. dollar’s strength against the Japanese yen remains the big force in play — bolstering “yen carry trade” hedge fund types are using to fund stock buys. You can see the vertical move in the yen carry trade in the chart below, which has surged in response to a big expansion of Japan’s bond buying stimulus program last week.
Hopes for some cheap money stimulus out of the European Central Bank was the other catalyst in play Thursday, as investors wait for action to address the slowdown in Eurozone economies like Germany.
There was chatter of some palace intrigue inside the ECB earlier this week, on reports that German officials were unhappy with ECB chief Mario Draghi’s constant teasing of a large sovereign bond purchase program — an idea that is unpopular with Berlin and could even be illegal under the ECB’s founding charter.
Draghi kept hopes alive, however, by maintaining his usual dovish tone as the policy statement said that additional unconventional stimulus measures would be deployed if needed.
Tesla Motors Inc (TSLA) ended with a 4.4% gain after being up as much as 12% Wednesday night in the after-hours session following better-than-expected profits for the third quarter. Skeptics pointed to the delay of Model S sales and the slight production delay on the new Model X SUV. CEO Elon Musk said that “Demand is not our issue, production is our issue.”
Friday’s session will be dominated by the release of the October payroll report. Analysts are looking for payrolls to expand by 240,000 with the unemployment rate holding steady at 5.9%. But there is the potential for a positive surprise given the drop we’ve seen in initial weekly jobless claims — a forward looking indicator of labor market health. Economic growth has also been very strong, averaging a 4%-pl,us annualized rate in four of the last five quarters.
Deutsche Bank economists believe that if the current pace is maintained, the unemployment rate could drop below 5% by the end of 2015 — which is significantly better than the Federal Reserve’s 5.5% forecast. If so, this would bring forward both the timing and the pace of the Fed’s interest rate hiking campaign.
As partisan bickering breaks out (as it inevitably will) ahead of the December 11 expiration of the current budget resolution and the March debt ceiling deadline, investors are sure to respond negatively to the realization that interest rates could be rising much sooner than they expect.
This may explain why high-yield corporate junk bonds — which tend to be the most sensitive area of the market when it comes to changes in Fed policy — stalled out more than two weeks ago and are looking ready to drop on expectations of higher interest rates. As junk bonds go, so goes the stock market.
This is just one of the reasons I’ve recommended Edge and Edge Pro subscribers cash out of positions like Pacific Biosciences of California (PACB), which gained more than 12% between October 23 and November 4, and prepare for another round of market weakness.
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