Like Sylvester Stallone in Rocky–or the plot of just any underdog film you can think of–the market started the day beaten down on its way to claiming the crown.
Agence France-Presse/Getty Images The S&P 500 gained 0.8% to 1,782, after falling as much as 0.4% this morning, while the Dow Jones Industrial Average rose 0.5% to 15,821.63. Both were record highs, the S&P 500′s 34th this year, the Dow’s 36th.
The market was given a boost by Macy’s (M), which rose 9.4% to $50.68 after reporting stellar earnings, Pioneer Natural Resources (PXD), which gained 6.9% after it announced that two of its oil wells had started chugging out crude, and General Motors (GM), which gained 4.9% to $38.44 after it announced that it would move its international headquarters to Singapore from Shanghai. PVH (PVH) and Cliff’s Natural Resources (CLF) both gained more than 4%.
Miller Tabak’s Andrew Wilkinson calls the market’s turnaround “pretty impressive.” He writes:
The index has rebounded to 1776.35 from an earlier low at 1760.64 and has engulfed Tuesday's range by piercing its low en route before surpassing its high…[With] the percentage of S&P 500 stocks trading new 52-week highs…at 6%, one could argue that the move is lacking fresh impetus, on the other it could signal that stocks not having made new peaks lately are behind the latest advance. At the time of the May and September record heights for stocks, the percentage of stocks rising to 52-week peaks was 31% and 26% respectively. At the end of October they reached 16%.
While there was little news to explain either this morning’s weakness or the afternoon’s move higher, that won’t be the case tomorrow. We’ll get jobless claims data. We’ll get the U.S. trade balance. And we’ll get Janet Yellen, whose opening remarks were released after the close, being grilled by the Senate on her way to replacing Ben Bernanke as head of the U.S. Federal Reserve. Jefferies’ Ward McCarthy offers his thoughts on what to expect:
Our expectation is that she will be very dovish regarding the "optimal" monetary policy for the current economic doldrums, but we also expect that she will not fit the media typecast of being a "serial dove." Yes, she will strongly defend the current highly accommodative monetary policy as being necessary and effective, and she will also defend the Fed actions that have taken monetary policy to the current state.
She will also be noncommittal if she is pushed to identify the timing of the initial tapering and the appropriate timing for the first firming of rate policy. The easy answer to those questions is to simply note that these decisions are up to the FOMC and the next Chairman, who has yet to be determined. Were these questions to be put to her as hypotheticals, it would increase the probability that we might learn quite a bit about Yellen's commitment to maintaining QE and extended rate guidance.
Still, the market is becoming convinced that tapering will begin soon. Consensus appears to be March; some believe it could be as soon as December. Treasury yields, for one, rose today, and Capital Economics’ John Higgins worries about the impact of rising bond yields on the stock market. He writes:
The earnings yield of a stock market index should be closely related to the average real yield of long-dated bonds issued by its constituents. In the US, we think the latter is likely to rise significantly during our forecast window. Although the gap between the earnings yield and the average real bond yield is currently more positive than usual, upward pressure on the latter is set to undermine the valuation case for equities over the next few years.
But what’s the next four years when we have so much to look forward to tomorrow?
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