Stocks could tip toe past Halloween before they get spooked again.
The stock market had its best day since late July, after Thursday's report of better-than-expected third quarter GDP sparked a return of the "risk trade." That is a tightly linked trade, where assets that thrive in an economic recovery, like stocks and commodities, rise and safe haven plays, like the dollar and bonds sink.
Third quarter GDP signaled the end of the recession with the first positive growth since second quarter, 2008. At 3.5 percent, it topped economists' expectations for growth of 3.2 percent. The better number prompted at least one economist, Deutsche Bank's Joseph LaVorgna, to bump his forecast for fourth quarter and 2010.
The Dow jumped 199 or 2 percent to 9962, and the S&P 500 rose 23 to 1066, a 2.3 percent gain. The Nasdaq was up 1.8 percent at 2097. The dollar though lost 0.8 percent against the euro, after four days of gains, and the dollar index was down about 0.6 percent, at 75.99 in late afternoon. Commodities jumped, with oil gaining 3.1 percent to $79.87 and gold, copper, wheat and soy beans all higher on the day.
Stocks could head into Friday on a positive note. "Friday is the last day of the year for a lot of people, and that should help the stock market," said Tim Smalls of Execution LLC.
"Over the last decade, the majority of the time, the market has done well on the last two days of October. There's a lot of mutual funds that close out their year tomorrow. I think what you're seeing today and tomorrow is some money being put to work," said Smalls. Traders have said selling by mutual funds was responsible for some of the market's decline in the last couple of days, as the month end approached.
The economic news du jour includes personal income; the employment cost index, Chicago Purchasing managers and consumer sentiment." But the weak dollar and better GDP has traders already looking ahead to next week's Fed statement Wednesday and October jobs report Friday.
Traders have been debating for a week now whether the Fed will change the language in its statement to remove the section about holding rates low for an extended period of time. The topic was first floated in a Financial Times story last week and was picked up by other media since then.
Many Fed watchers are skeptical the Fed would drop that language, even as it remains a topic of major interest on currency and bond trading desks. A change in that specific language would signal markets that the Fed is becoming comfortable with the idea of higher rates, providing some support for the dollar. The dollar's slide has become a worry for many in the markets, who fear it will lead to rising inflation.
"I don't think they're going to change it until the jobs data looks better," said Jeff Kleintop, chief market strategist at LPL Financial. He said the Fed could change the language early next year and then move on rates later in the year, as they did in 2004.
Kleintop said that lack of action by the Fed should mean the continuation of a good environment for stocks, for the time being. "I think the trend (for stocks) is higher though the easy gains have been had," he said. "We could put on another 5 percent or so between here and the end of the year, and maybe another 5 percent early next year, but then we could start to give them back up again as the market anticipates Fed rate hikes."
Kleintop is more bullish on the near term outlook than some strategists, and he believes the market will be driven by the large amounts of cash still on the sidelines. He pointed out that after a 5 percent correction, the losses were already half gone in a day as investors aggressively bought the dip.
"I think what's interesting is that while Wall Street, or investors, seemed to be ahead of analysts when it came to earnings..they seem to be behind the curve relative to the economists," said Kleintop.
"I think the market was expecting something in the 2 percent area...It was a little bit of a surprise here and certainly confirmation of the recovery, and if we could get the jobs data to look better, we'd be more comfortable that it's sustainable."
LaVorgna raised his forecast for fourth quarter GDP to 4 percent, followed by 4.5 percent in the first quarter, and then 3.5 percent in the second quarter. He had expected third quarter GDP of as high as 4 percent. "These numbers next year are not strong, relative to history. We're still way below the average," he said.
"I thought they (third quarter) were very good numbers. It was a nice mix. The recession is over. I think that's the key thing," he said. "Now the question is when does the labor market partake in his improvement. Nobody's going to believe the recovery is over until we see jobs turn around."
"I don't see stimulus in the numbers yet, so this isn't a government stimulus story yet. We still have massive inventory liquidation yet..At some point, inventories will be positive," he said.
Disappointing in the numbers was that cap ex was only up 1 percent. "I thought it was going to be up 7 or 8 percent. I want to see it a little bit stronger," he said.
"The good thing is you saw consumer spending turning up," he said.
As stocks soared, Treasurys fell. The afternoon auction of $31 billion in 7-year notes was weaker than previous auctions of $85 billion in 2- and 5-year notes this week. "I think supply suddenly caught up with us a little bit," said Brian Edmonds of Cantor Fitzgerald.
"We saw the market first start trading off after GDP..I think given the relative strength of the 2-year note and 5-year notes..we did tail a little bit and the market started trading off afterward," said Edmonds.
The 10-year yield, as a result rose to 3.5 percent from 3.42 percent.
What Else to Watch
There are some major earnings Friday, including Chevron, Sanofi-Aventis, Constellation Energy, Duke Energy, Aon, Arch Coal, CMS Energy, Penske Auto Group, Washington Post and Weyerhaueser.
Also, the White House will brief media tomorrow on the status of stimulus spending and jobs, covered by the Recovery Act.
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Correction:An earlier version of this posting incorrectly stated that existing home sales for September would be released today, that was an error which has been corrected.
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