EmailThe stock market is on a roll right now, pricing in the prospect of a fiscal cliff compromise. The S&P 500 has gained 2.4% the last two days alone and 7.0% since November 15.
If nothing else, this rally provides a sense of how material the losses could be if the market's hopes are dashed and a compromise is not reached.
For now, though, the market is reading between the lines of the political boilerplate and is banking on a kumbaya moment on Capitol Hill before the new year.
That mentality was a driving force behind yesterday's 1.2% gain, which occurred on heavier-than-average volume.
The risk-on mentality was plain to see in suffering bond and gold prices. The 10-year note dropped 14 ticks, sending its yield up to 1.83%, while gold dropped 1.6% to $1671.80 per ounce.
Adding fuel to the equity market fire was an assumption that the weakness in Treasuries stemmed from an asset reallocation trade into equities. That is a reasonable theory when taking into account that the yield on the 10-year note has risen 25 basis points since November 16.
Treasury prices are firm this morning, yet the S&P futures are presaging a positive start for stocks.
The upside bias in the futures market can be attributed to several factors, including but not limited to the compromise hope, namely:
- Better-than-expected earnings from Oracle (ORCL), FedEx (FDX), and General Mills (GIS)
- FY13 EPS guidance from Johnson Controls (JCI) that is above the consensus estimate
- News that General Motors (GM) is going to purchase 200 mln shares from Treasury at $27.50 per share (an 8% premium to yesterday's closing price). The Treasury said it will sell its remaining 300.1 mln shares over the next 12-15 months.
- A better than-expected business climate reading out of Germany
- The World Bank raising its 2013 GDP forecast for China to 8.4% from 8.1%
- Strength in foreign equity markets, particularly Japan's Nikkei which jumped 2.4% on Tuesday. The Nikkei has surged 17% since November 13.
One point of minor disappointment was the November Housing Starts report. It revealed that starts declined 3.0% to a seasonally adjusted annual rate of 861,000, which was below the Briefing.com consensus estimate of 875,000. Single-family starts fell 4.1% to 565,000.
The market, however, took the news in stride, cognizant that a slowdown from the hot pace of late should not have been completely unexpected. In addition, the 3.6% increase in building permits, which were at a seasonally adjusted annual rate of 899,000 (Briefing.com consensus 876,000), provided an offset that suggested the slowdown in starts is likely to be only temporary.
The S&P futures are trading 0.3% above fair value. The market is overbought on a short-term basis and could see some consolidation in the absence of any new fiscal cliff headlines, but a fear of missing out on any announced deal in the near future should provide underlying support in the event of a pullback.
Intermarket relationships are becoming more interesting and need to be watched closely, particularly the interchange between the performance of the stock and bond markets.
