And the third time is the charm.
AFP On Monday, the Dow Jones Industrial Average broke 16,000 for the first time ever, only to finish the day under that big round number. On Tuesday, it tried again, but dropped at the end of the day. And after yesterday’s drop, 16,000 looked farther away than ever. But all it took was a little economic data in the form of jobless claims to push the Dow Jones over 16,000, this time to stay. The blue-chip index gained 0.7% to 16,009.99, while the S&P 500 rose 0.8% to 1,795.86.
JPMorgan Chase (JPM) and American Express (AXP) rose 2% and 2.1%, respectively, as financial stocks gained on speculation that the jobless claims data would spur the Federal Reserve to taper sooner rather than later, while Ace Ltd. (ACE) rose 3.8%. General Motors (GM) gained 1.1% after the US government said it could sell the last of its shares by year-end. On the downside, Target (TGT) fell 3.5% after reporting earnings that missed analyst expectations.
Now about those jobless claims. The number of Americans filing for first-time unemployment benefits fell to 323,000, well below forecasts for 335,000. And this time, the data was clea. No California problems, no government-shutdown hangover. CRT Capital’s Ian Lyngen warns investors not to get used to clean data:
The jobless claims data didn't come without significant caveats however, most notably that we're entering the period of the year when the holidays make seasonals difficult to estimate. With initial claims declining to the lowest since Sept, we're reminded that while it was NFP-survey week, Veteran's day is surely distorting the improvement in claims and it will be several weeks before the data is clean enough to influence NFP estimates. Long before then however, we'll get the Dec 6 employment report and this remains the most relevant near-term risk in the process of refining policy expectations (i.e. to taper or not to taper).
Deutsche Bank’s Alan Ruskin notes that investors finally seem to be getting the Fed’s message that tapering is not tightening. He explains:
The big story in the last 24 hours is how well the front-end of the US curve is trading. The last time US T.Note 10s were trading at these yields, both 3y and 5y yields were trading over 20bps above current levels. This can be read as a clear signal that the market is 'getting' the Fed’s attempts to separate out their balance sheet tapering decision from their forward guidance rate related decisions. Ironically, the more the market shows it is hearing this message, the greater the prospect of tapering. A well behaved front-end adds meaningfully to tapering risks! At the same time, if 10s start to threaten the 3% area soon, financial conditions will become a factor in the FOMC’s deliberations again, independent of the front-end – even if it confirms fears that the Fed is hostage to ‘the bond vigilantes’, hampering the QE3 exit.
STA Wealth Management’s Lance Roberts sees stocks gaining another 30%. He writes:
Top China Stocks For 2014
That’s right, despite all of the recent “bubble talk,” it is entirely possible that stocks could rise 30% higher from here. However, it is not because valuations are cheap because as I discussed in my recent analysis of Q3 earnings stocks are trading near 19x trailing earnings.
“Understanding this it is easy to understand the flaw in using “forward” estimates as a valuation tool. The use of forward, operating estimates, is only beneficial to Wall Street analysts who need to create a “valuation” story when none really exists. Overly optimistic assumptions about the future spurs faulty analysis in the present as sliding earnings leads to sharp valuation increases. The chart below shows the progression of forward P/E estimates since the beginning of 2012. Currently, with the S&P 500 valued at 18.89x reported earnings, it is hard to justify that the market is undervalued.”
The primary reason that stocks are likely to climb 30% higher from current levels, over the next 24-months, is because that is what happens during the “mania” phase of a bull market cycle…
Either that, or we’re headed for a really big fall.
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