U.S. equities rose again Wednesday, pushing large-cap stocks up 4% from the futures market low seen in the wake of the Paris terror attacks.
The weakness seen late Tuesday from a German bomb scare became a distant memory, as aggressive bombing against ISIS by France and Russia — as well as law enforcement raids by French law enforcement — seem to have awakened bullish emotions.
The release of the October Federal Reserve meeting minutes encouraged a late-session melt up to help stocks close near session highs, as they were considered slightly more dovish than expected, pushing the odds of a December interest rate hike down slightly.
In the end, the Dow Jones Industrial Average gained 1.4% to cross back over its 200-day moving average, the S&P 500 saw a 1.6% uptick, the Nasdaq Composite ended 1.8% higher and the Russell 2000 finished with a 1.6% gain. Further: Treasury bonds were weaker, the dollar was largely unchanged, gold gained 0.3%, copper lost more than 1% and crude oil gained 0.2% to close at $40.75 a barrel.
Healthcare stocks led the way with a 2% gain, followed sharply by financials, up 1.8%. Defensive utility and telecom stocks were the laggards, up only 0.8%.
In M&A action, Norfolk Southern Corp. (NYSE:NSC) gained 6.4% after it received a takeover proposal from Canadian Pacific Railway Limited (USA) (NYSE:CP) in a deal it criticized as being “low premium” and highly “conditional,” valuing the company at around a 9% premium to the pre-announcement price.
Apple Inc. (NASDAQ:AAPL) gained 3.2% after being added to Goldman Sachs’ Conviction Buy list. GS expects investor focus to shift from unit growth to monetization of the installed base of iPad/iPhone users and the ability to harvest recurring revenues from efforts like Apple Music.
Retail earnings remained in focus with Target Corporation (NYSE:TGT), dropping 4.3% after reporting third-quarter results in line on margin pressure. Staples, Inc. (NASDAQ:SPLS) lost 2.7% after comp-store sales dropped 2%. Lastly, Lowes Companies, Inc. (NYSE:LOW) gained 0.9% on an earnings beat and 5% comp-sales growth.
On the economic front, housing starts disappointed slightly coming in at a 1.06 million seasonally adjusted annualized rate — down 11% month-over-month — although this was the seventh consecutive month above the 1 million level. That’s a run of strength not seen since 2007.
Turning back to the Fed minutes, Michael Hanson at Bank of America Merrill Lynch notes that policymakers generally saw an improved global outlook in October as labor market concerns grew stale in the wake of the blowout jobs report seen earlier this month.
A lack of conviction in the inflation outlook — with the Fed desiring a return to its 2% target over the medium term — remains the last major hang up for rate liftoff. This explains the slight weakening of the dollar and the jump in gold and silver stocks. Hanson believes that ongoing strong job gains and a waning inflation drag from low commodity prices should alleviate these concerns.
One possible hang up is the way that long-run inflation expectations have weakened slightly. For now, the futures market continues to put the odds of a rate hike next month — something that hasn’t happened since 2006 — at around 80%.
I remain skeptical of the market’s ability to surge to fresh highs given ongoing weakness in areas like commodity prices and high-yield corporate bonds. Small-cap stocks have also been lagging behind.
Through the end of last week, investors were growing increasingly nervous about the consequences of the first increase in the cost of credit in nearly a decade.
As terror attack headlines fade, a refocusing on this issue should result in the resumption of selling pressure heading into the Thanksgiving holiday next week.
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.
