U.S. equities notched another new record high on Thursday, pushing the Dow Jones Industrial Average ever closer to the 20,000 threshold as the post-election melt up continues.
The catalyst was another rout in the bond market which continues to pull money out of fixed-income into the stock market as investors chase returns. The impetus was a surprise announcement overnight that the European Central Bank would extended its bond-buying program more than expected (through year-end 2017) while also trimming the pace of monthly purchases from 80 billion euro to 60 billion.
This was a “dovish taper,” which, when combined with the expected Federal Reserve rate hike next week and the inflationary expectations surrounding President-elect Trump’s fiscal stimulus plans, further lifted long-term interest rates and thus, lower bond prices.
In the end, the Dow Jones Industrial Average added 0.3%, the S&P 500 gained 0.2%, the Nasdaq Composite wafted up 0.4% and the Russell 2000 ended 1.6% higher.
Treasury bonds were weaker, the dollar was broadly stronger, gold lost 0.4%, and crude oil reversed recent weakness to gain 2.2%. The strength in energy lifted the ProShares Ultra Crude Oil (NYSEARCA:UCO) to a 21% gain since recommended to Edge subscribers on Nov. 15.
Financial stocks led the way with a 0.9% gain while industrials were the laggards, down 0.5%. Yoga pants maker Lululemon Athletica inc. (NYSE:LULU) gained 15% after reporting a quarterly earnings beat on a 7% rise in comp-store sales vs. The 5.2% rise expected. Margins beat expectations for the fourth straight quarter. Costco Wholesale Corporation (NASDAQ:COST) gained 2.4% on better quarterly sales and margin improvement.
On the economic front, there was further confirmation of steadiness in the labor market with initial jobless claims falling 10,000 to 258,000, sliding below the 260,000 expected. That was the 92nd straight week with claims below 300k — a streak not seen since 1970. And with the Fed’s next policy meeting wrapping up Dec. 14, economists surveyed by the WSJ noted an increase in rate expectations with respondents seeing the Fed policy rate at 1.26% on average by December 2017, representing four rate hikes from current levels.
The rates weakness lifted the ProShares Ultra Short Treasury Bond (NYSEARCA:TBT) 2.2% for Edge subscribers to take their total gain since added in August to 31%.
With investors still in their post-election honeymoon period, stocks will likely continue to drift higher through the end of the year. But risks are on the rise, reflected in the upward movement in the CBOE Volatility Index this week as Wall Street insiders grow weary at the market’s extension above its medium-term trend measures — suggesting the uptrend is vulnerable to a pullback.
And heading into next year, as the upward drift in interest rates continues, investors will likely begin to consider the downsides of the bloodbath in bonds, including higher mortgage rates, pricier auto loans and lowered consumer confidence. Goldman Sachs economists also noted today that any fiscal stimulus from the incoming Trump Administration is unlikely to hit until early 2018 as the legislative process takes time to work.
For now, I continue to recommend a relatively cautious approach with a focus on non-equity areas of movement including the strong dollar, recovering energy prices and rising interest rates.