U.S. equities finished mixed on Wednesday ahead of the long Thanksgiving holiday. Markets are closed Thursday and the New York Stock Exchange will close early on Friday. In the stock market today, the Dow Jones Industrial Average lost 0.3%, the S&P 500 gave back 0.1% the Nasdaq Composite added 0.1% and the Russell 2000 dropped 14 basis points.
What’s more: Treasury bonds strengthened, the dollar was under pressure, gold gained 0.8% and crude oil gained 2.1% with a focus on inventory data and reports of a nine-month extension to the OPEC freeze deal.
Click to Enlarge Breadth was positive, with advancers outpacing decliners 1.3 to 1. Volume was light, with trading activity at just 79% of the NYSE’s 30-day average.
Defensive telecom stocks led the way with a 1.7% gain on Net Neutrality hopes. Financials were the laggards, down 0.4%. TiVo (TIVO) gained 7.1% after the ITC issued a final ruling that Comcast’s set-top boxes are a patent infringement.
Deere (DE) gained 4.3% on better-than-expected quarterly results on a 26% year-over-year increase in equipment sales. And GameStop (GME) gained 3.8% on solid quarterly results with video games a bright spot on the success of the Nintendo Switch.
On the downside, Guess? (GES) lost 13% on weak results on warmer than usual weather. HP (HPQ) fell 5% despite a revenue beat thanks to market share gains and higher average selling prices. Investors had baked in higher expectations and remain concerned about structural headwinds in the PC/Printing space.
On the economic front, there was a number of central bank-related headlines. Reuters reported that the Bank of Japan is dropping “subtle, yet intentional” hints it could exit crisis-mode stimulus earlier than expected. Federal Reserve Board Chair Janet Yellen said the Fed expects inflation to increase over the next year or two but remains “very uncertain” about this dynamic.
And the release of the latest Fed meeting minutes revealed growing policymaker concern about financial market valuations and excessive optimism leading to a potentially damaging reversal in stock and bond prices. Like, “Duh!” people.
Click to Enlarge It seems farfetched right now, I know, with stocks continuing to melt to new highs with nary a care in the world. Big Tech stocks like Amazon (AMZN) and Apple (AAPL) are going vertical out of their late October lows.
The Federal Reserve’s rate hikes have yet to bite the real economy. And there remains the specter of a fiscal stimulus push from the tax cut legislation working through Congress.
And yet, some on Wall Street are sounding the alarm. Bank of America Merrill Lynch chief investment strategist Michael Hartnett, in a note to clients this week, believes it will all end within the next seven months forecasting “The Big Top” in the first half of 2018 as “the last flames of [quantitative easing], U.S. tax reform and robust [earnings growth] force everyone still skeptical into the market.”
He’s dubbed it the “Icarus Trade” and acknowledges that the air is, indeed, getting thin up here.
The catalyst for the eventual top will be the reappearance of inflation pressure, which will be a “game changer” for this era of central bank largesse that shatters the “Goldilocks consensus” that weak growth is good (since it means more monetary stimulus) and strong growth is good (since rates will remain low anyway).
The consequence? An end to the current 50-year low in stock market volatility and the 30-year low in bond market volatility with a “flash crash” in the vain of 1987, 1994 and 1998 episodes.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.