Investors certainly liked what they saw in Friday’s jobs report, and the subsequent rally propelled the major indices up by more than 2% each on Friday alone. The lift closed out a rough week for the stock market on a very positive note, and bulls went into the weekend smiling with the Dow up by 370 points. It was a big win on Friday, but for the week, the Dow and Nasdaq were up 0.3% while the S&P 500 was basically unchanged. It was a volatile week, but it finished strong following Thursday’s big decline, and bulls are optimistic that the seasonal lift and the Santa Claus Rally will be back in action on Monday.
The government jobs report for November was the key factor in rallying the troops on Friday. We saw 211,000 new jobs in November, and while that was down from the stellar 298,000 new jobs that we saw in October, Friday’s figure topped economists’ estimates of 200,000. It all but guarantees a Federal Reserve rate hike following the conclusion of its December 15th-16th meeting. However, investors did not seem to mind the thought of a rate hike as the stock market closed out a rough-and-tumble week on an extremely bullish note. By the way, the unemployment rate remained unchanged at 5.0%.
So if investors celebrated Friday’s employment report, what does that mean for the stock market as we head toward the New Year? It means that investors see a vibrant enough economy that could handle a rate hike later this month. The 211,000 new jobs was neither too hot nor too cold, but like the Goldilocks metaphor, it was just right. Had it been a weak number, the Fed would have had its hands tied on raising interest rates even by just a quarter point. Had the jobs number blown away estimates to the upside, it might have had investors possibly worried about a 50 basis point rate hike on December 16th.
The Federal Reserve wants to “normalize” interest rates back to “normal” levels, and we all know that the near-zero levels we have seen for seven years are not all that “normal.” The massive rate cuts we saw following the Lehman collapse and the subsequent bursting of the housing bubble were supposed to be an emergency “quick fix” for the economy, but the economic rebound took a whole lot longer than the Fed expected. The good news is that even some of the most devastated housing markets have bounced back, so the Fed definitely did its job well. The problem now is what to expect with a trend toward rising interest rates instead of short rates guaranteed to stay near zero.
A rising interest rate scenario would affect the housing market, and it could also affect the high-yield bond market dramatically. There are a lot of corporate financing deals that never would have occurred without the low-interest rate scenario. So the question is what higher rates might do as the financial landscape “normalizes.” Home mortgage rates are tied to the 10-year U.S. Treasury, and while the 10-year is still at 2.28%, a spike in that level could chill a housing market that has continued to improve nationwide. The Fed knows this, and that is probably why it has held off on rate hikes for so very long.
Friday’s stock market rally, following the good jobs report, was proof that the stock market might be ready for higher rates. A rate hike on December 16th would not be a surprise for the stock and bond markets, and many market strategists are saying that a rate hike by the Fed would be a sign of confidence. Oddly enough, we could even see a big rally in the stock market if the Fed DOES raise rates. This would be counter to Alan Greenspan’s warnings of a market “taper tantrum” if and when the Fed does raise rates, and if we did see a big market rally, few bulls would be complaining.
We do have the seasonal lift scenario in place, and it would be a whole lot easier to raise rates now instead of this past September or October when financial markets were under a fair amount of stress. Santa Claus might still be coming to town, so stay tuned as we will see if Friday’s big rise will carry over into next week and the rest of the year. That said, the Gorilla wishes each and all a happy holiday season and a restful weekend. Friday’s bounce was a great way to end a roller-coaster week. We will be back in action on Monday!
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