The Inside Scoop on the Dow's 420 Point Surge

It appears that the Santa Claus rally has finally come to town on Wall Street. The benchmark indices extended yesterday’s triple-digit rally, with the Dow closing up 420+ points today. The past two days have been a notable reversal from the previous multi-day losing streak. The rally was sparked by yesterday’s statement from the Federal Open Market Committee (FOMC) regarding the central bank’s policy decisions.

Wall Street got the news that it wanted, which was the Fed is going to "be patient in beginning to normalize the stance of monetary policy." That’s Fedspeak for "interest rates are going to remain near zero for the foreseeable future."

Given that consumer prices just posted their largest drop in six years (according to yesterday’s November CPI report), this makes sense. Over the past 12 months, core consumer prices (a key measure of inflation) have risen just 1.7%, well below the Fed’s 2% inflation target. In this deflationary environment the Fed has wiggle room to keep rates low, and by extension, investors happy.

The ultra-low interest rates allow corporations to borrow very cheaply on the bond market and then use those proceeds to buy back their stock. And when companies buy back their stock this boosts earnings per share and oftentimes share prices.

Today we also received confirmation that the U.S. economy is alive and well with the release of two more reports. First, weekly jobless claims—a common measure of layoff activity—dropped by 6,000 to 289,000. That beat economists’ projections for jobless claims to total 295,000. In 14 of the last 15 weeks, jobless claims have been below 300,000, which suggests the job market is steadily improving.

Second, the index of economic indicators increased 0.6% in November, in line with expectations. Eight of the 10 indicators increased and added positively to the index last month. This bodes well for fourth-quarter GDP, and the general consensus is that the economy should continue to grow at a 3% annual rate.

We’re in a “Goldilocks” environment where the U.S. economy is clearly growing, but the Fed is still keeping rates low in the interest of avoiding deflation. So we’re getting the best of both worlds, and Wall Street appears to finally recognize it. My hope is that the market will keep the momentum going so that we truly have a Santa Claus rally heading into the holidays.


Louis Navellier

Louis Navellier

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