Major U.S. indexes reversed to the upside Thursday as gains by oil stocks such as Exxon Mobil (XOM) overwhelmed profit-taking by investors after the biggest two-day rally in five years. Earlier in the day, a dismal earnings report from Sears had weighed on sentiment, with traders all but ignoring a report showing solid third-quarter gross domestic product growth.
The Dow Jones industrial average was up 25.04 points, or 0.19%, to 13,314.49. The broader S&P 500 index edged up 0.25 points, or 0.02%, to 1,469.27. The tech-heavy Nasdaq composite index rose 0.45 points, or 0.02%, to 2,662.87.
Optimistic interpretations of Federal Reserve Vice Chairman Donald Kohn's comments on Wednesday, which suggest a Fed rate cut is nigh, continue to support equities markets.
George Feiger, Chairman of Contango Capital Advisors in San Francisco, said he's bewildered by the euphoria that greeted the prospect of a quarter-point rate cut on Wednesday, given that those the interest rates that the government pays have much less impact on economic growth than the rates that companies and individuals pay. With junk-rated credit spreads up between 100 and 200 basis points over the past couple months, the Fed's easing rates by 25 or even 50 basis points won't do much to lower the rates that companies pay and that are used to determine what level of capital spending they can afford, he said.
"Credit spreads have widened much more than the Fed is capable of reducing interest rates by," he said. "As credit problems emerge in the coming year, these credit spreads will keep jumping up."
The average high-yield 10-year corporate bond is now paying 500 basis points over Treasury yields and was paying as little as 250 basis points over Treasurys a few months ago, he said. And that spread was as wide as 1300 basis points in the 1990s, so junk spreads are capable of jumping much more than they have already, he added.
In economic news Thursday, initial jobless claims jumped 23,000 to 329,000 for the week ended Nov. 24. The early Thanksgiving holiday may have contributed to the unexpected increase, Action Economics said. November's initial claims averaged 338,000, compared with averages of 327,000 in October, 313,000 in September and 324,000 in August.
Third-quarter GDP growth was revised up to 4.9% from the 3.9% rate in the preliminary report. As expected, the bulk of the increase came from inventories, which were adjusted to a net gain of $27.1 billion from $9.9 billion, and net exports, which were revised to a net add of $40.5 billion from $27.7 billion. Consumption was lowered to 2.7% from 3.0% and government spending was revised to a gain of 3.9% from 3.7%. The GDP price index was raised to a 0.9% gain from 0.8%, while PCE-core inflator remained at a 1.8% gain.
Action Economics said it continues to expect GDP growth of 1.7% in the fourth quarter. The White House said on Thursday that it now sees real GDP growth of 2.7% for both 2007 and 2008.
New home sales rose 1.7% to an annualized rate of 728,000 in October but fell far short of the 750,000 rate that was anticipated. Making the report that much gloomier was the big downward revision in September to an annualized rate of 716,000 from the initial 770,000 rate and the adjustment in August's pace to 717,000 from 735,000. Gains during October were seen in three of the four regions, with only the West showing a decline. At the October selling pace, the supply of homes fell to 8.5 from a revised 9.0 months. The median selling price dropped 13% to $217,800 from a year ago.
This week's economic data, from durable goods orders to existing home sales to the Fed Beige Book, which surveyed October to mid-November, are pointing to significant economic slowing, but revived hopes for a Fed rate cut on Dec. 11 are causing any new negative reports to be taken positively by investors, in that they are expected to further convince the Fed of the need for easing.
Oil prices soared by more than $4 to over $95 per barrel in overnight trading after an explosion at Enbridge's major Canada-to-U.S. export pipeline in Minnesota.