U.S. equities posted their best one-day gain since October on Friday after the November non-farm payroll report came in slightly better than expected.
The Dow Jones Industrial Average gained 2.1%, the S&P 500 surged 2.1%, the Nasdaq Composite went up 2.1% and the Russell 2000 ended the day 1.1% higher. What’s more, treasury bonds firmed, the dollar strengthened, gold gained 2.4% and oil fell 2.4% to close at $40.11 after OPEC’s meeting didn’t result in a production cut.
Defensive telecom stocks led the way with a 2.7% gain, while energy stocks lagged 0.5%. And troubled action-cam maker GoPro Inc (NYSE:GPRO) lost 4.9% after suffering an analyst downgrade, likely cutting into Ambarella Inc’s (NASDAQ:AMBA) rally Friday.
November non-farm payrolls grew by 211,000 positions, slightly ahead of the 190,000 Wall Street was looking for as the unemployment rate held steady at 5.0%. The labor force participation rate moved up slightly while average hourly earnings grew 2.3% over last year.
To be fair, stocks have blasted higher on payroll Fridays regardless of the result: They did it back in September (big miss) and October (huge beat).
Thus, the bigger factor in today’s rise was probably comments from European Central Bank chief Mario Draghi reinforcing his commitment to returning inflation to target and bolstering economic growth by unleashing additional stimulus measures, if necessary. This eased some of the disappointment seen on Thursday by an incremental expansion of existing stimulus measures (six-month bond buying extension, small interest rate cut) by the ECB, when more was expected.
Because stepping back, the fears that’ve kept the Dow below the psychologically important 18,000 level remain in play: Worries over the consequences of a likely Federal Reserve interest rate hike at the Dec. 16 policy announcement, made all the more probable by Friday’s solid employment report.
Remember, stock price weakness seen on Wednesday and Thursday were driven, in large part, by comments from Fed Board Chair Janet Yellen that consistent job market gains were increasing her confidence that the annual inflation rate would soon return to the Fed’s 2% target.
She added that even tepid monthly payroll gains of less than 100,000 would be enough to keep the recovery on track. We got much more than that last month.
But maybe we should simply take today’s job gains and stock market rally at face value: Investors are happy to see the economy shrugging off a myriad of headwinds, from a recent slowdown in U.S. factory and services sector activity to terrorist attacks and weakness in crude oil and high-yield bonds, to keep putting more and more people to work.
If so, then the bulls will need to maintain the upward momentum heading into the Fed’s rate hike announcement, which economists at BNP Pariibas said was now “all systems go.” And that means finally pushing the Dow Jones Industrial Average back over the 18,000 level that hasn’t been crossed since July.
Because otherwise, this looks like Wall Street shenanigans ahead of coming post-rate hike weakness suggested by ongoing weakness in small-cap stocks, commodities, high-yield bonds, utility stocks and transportation stocks.
Consider the chart above comparing the strength in the Dow Jones to weakness in high-yield corporate bonds (red line) and commodity prices (blue line).
A decision by OPEC to leave production unchanged on Friday — in a continuance of its strategy to lower prices to recapture market share from U.S. shale oil producers — will keep the pressure on energy prices, which in turn, will keep the pressure on overall corporate profits due to the drag from energy producers like Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX).
The drop in junk bonds reflects an acknowledgement by bond traders that the credit cycle is turning, default rates are set to rise, and that deeply indebted U.S. shale oil producers will be increasingly squeezed in the months to come.
Sure, steady job gains are great. Yet it’s hard to see stocks shrugging off all the other factors discussed here. Especially the fallout from the first rate hike in nearly a decade.
That’s why I continue to recommend precious metals positions to Edge subscribers, which are rising as fear and uncertainty rises, including Kinross Gold Corporation (NYSE:KGC) which is up 15.1% since the position was first recommended on Nov. 19.
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.
