The S&P 500 Index and the Dow Jones Industrial Average pushed to new all-time highs this week on the back of political clarity and a U.S. dollar rally. The Nasdaq and Russell 2000 also saw smaller gains following their much stronger rallies over the prior weeks.
While the Republican win in the midterm elections may not end all of the gridlock in Washington, we are hopeful some compromises can be made. Two areas that can benefit stocks would be an agreement between Republicans and Obama are free trade deals and tax reform, both of which have not advanced over the past several years. Stocks have historically done well with Democrat presidents and a Republican Congress, with the Clinton presidency being a recent example.
Seasonal factors and presidential cycles are also working in favor of the stock market. Two of the best months for stocks since 1950 are November and December. The period from late October until the first half of 2015 is also the best period for stocks during the eight years of a two-term presidency. Stocks appear to have rallied right on schedule.
In economic data, the U.S. economy continues to stand alone as a bright spot. This week’s jobs data showed further improvement, with 214,000 new jobs created. The unemployment rate fell to 5.8 percent, the lowest in 6 years. Earlier in the week, we saw the ISM manufacturing PMI come in strong once again, signaling continued expansion in that leading sector of the economy.
Earnings were mixed this week. Disney (DIS) delivered strong results, but Qualcomm (QCOM) was hurt by a potential anti-trust investigation in China. This has been followed by investigations in Europe and the U.S. which has caused Qualcomm shares to lose more than 8 percent.
Two of the biggest moves this week occurred in the commodity and currency markets. Oil prices broke lower once again and pulled many commodities along with it, including gold. The Russian economy could be in serious trouble if this trend doesn’t reverse in the next few weeks as the government budget is banking on oil at more than $100 per barrel. If these price levels persist, major spending cuts will need to be enacted.
In the currency market, the U.S. dollar is closing out the week near its highest levels post-2008. This week saw the yen continue to slide in the wake of the Bank of Japan’s expansion of quantitative easing. The euro also slid on Thursday, following comments from European Central Bank head Mario Draghi that implied more intervention could be coming. These two are the main components of the U.S. Dollar Index and we’ll enter next week with the possibility of a serious U.S. dollar bull market breaking out for the first time since the mid-1990s.
Yen weakness is also hitting Asian exporters, with both the Korean won and the Taiwan dollar sinking. The Asian Dollar Index and WisdomTree Dreyfus Emerging Currency Fund (CEW) are the mirror image of the U.S. Dollar Index and on the verge of sliding into bear markets.
Politically and economically, events are favoring the U.S. asset markets. Growth is solid and the Republican Congress is seen as a check on government spending. Central bank policy is favorable for the U.S. dollar with the conclusion of our quantitative easing strategy, but ramping up in Japan and potentially Europe. If a full on U.S. dollar rally breaks out, U.S. stocks and bonds will be in one of the most favorable environments since the late 1990s.
