Stocks soar to all-time highs on strong data, earnings

Know what you own, and know why you own it. – Peter Lynch

Both the Dow Jones Industrial Average and the S&P 500 Index continued their surge last week and closed at all-time highs as investors cheered strong U.S. economic data, an optimistic outlook from the Federal Reserve and increased stimulus from the Bank of Japan. The drumbeat of good news began on Wednesday in the Fed’s statement, which painted a rosy picture of the U.S. economy despite the fact that its bond-buying program officially ended in October. It also reiterated that interest rates would remain near zero for a “considerable time” and that longer-term inflation expectations have “remained stable”. According to the Fed, the first rate hike would only be implemented if the economy improves faster than expected. This upbeat assessment of the economy was followed by release of the U.S. third quarter gross domestic product (GDP), which rose a better-than-expected 3.5% on a surge in exports and the biggest increase in defense spending in five years. Consumer spending and business investment also increased at a healthy rate and prompted many economists to raise their fourth quarter GDP forecast to 3%. But the biggest surprise for investors came on Halloween as the Bank of Japan unexpectedly announced that it would increase the size and scope of its asset purchases in order to boost its sluggish economy. This added stimulus should help ignite weak global growth by creating a wealth effect and boosting consumption. Lost in the excitement over Japan’s announcement were the strong third quarter corporate earnings reports, which continue to surpass analyst estimates and have risen over 7%.

Last Week

Durable goods orders for September fell 1.3% due primarily to a substantial drop in aircraft orders. Case-Shiller reported that home prices in September rose 5.6% from the previous year, which was slightly less than expected. U.S. jobless claims rose modestly last week but are still at historically low levels and suggest further improvement in the labor market. Consumer confidence reached a seven-year peak of 94.5 as optimism about the job market and the hope of additional wage growth fueled the gain. Such a high reading should be a welcome sign for retailers heading into the holiday season.

For the week, the Dow Jones Industrial Average leaped 3.5% to close at 17,390 while the S&P 500 Index rose 2.7% to close at 2,018. Both averages are at all-time highs. The Nasdaq Composite Index added 3.3% to close at 4,630.

This Week

The ISM manufacturing index should increase and show that the sector is expanding as low energy costs continue to be a positive factor. The non-farm payroll report for October will be released on Friday and expectations are for about 235,000 new jobs to be created and the unemployment rate to remain at 5.9%.

Tuesday is Election Day and control of the U.S. Senate is at stake, although it appears to close to call at this time. In years that have a mid-term election, stock market returns have historically been strong in the six months that follow regardless of the outcome.

Among the companies due to report third quarter earnings this week include Sysco, Archer Daniels Midland, Walt Disney, Devon Energy, Duke Energy, Emerson Electric, Qualcomm and Berkshire Hathaway.

Portfolio Strategy

Now that the scary month of October is over, investors can turn their attention to the months of November and December, which historically have been strong ones for the stock market. After falling sharply at mid-month with a decline of 9.5% in the S&P 500 from its previous all-time high, stock prices have come roaring back to make new all-time highs as better-than-expected corporate earnings reports have been the driving force. Recent economic data has also been favorable as the housing sector continues to improve, manufacturing data shows increased expansion and the unemployment rate is below 6%. By the Fed’s own admission, interest rates should remain low for the foreseeable future and oil prices have fallen to levels not seen in years. Both should have a positive effect on consumer spending. While weak economies in Europe have caused concern about slowing global growth, the announcement of further easing measures by the Bank of Japan could alleviate some of those concerns and even prompt the European Central Bank to adopt similar policies. In fact, the ECB meets this week to review their interest rate policy. Traditionally, the fourth quarter of the year has been the strongest one for the stock market and this year appears to be no different, as stocks seem poised to go higher.