Stock Market Party Lasts Another Day

Stocks post another broad rally amid falling oil.
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Thursday's rally picked up where Wednesday morning's ended. That is, the Bush victory propelled sectors such as energy, defense and health care, while lower oil prices helped retailers, technology and consumer shares. Adding to oil's pop was a healthy retail sales roll call for October that eased worries about the upcoming holiday season.

The

Dow Jones Industrial Average

closed up 1.8% to 10,314.80, led by a 8.5% jump in

Altria

(MO) - Get Report

, as the former Philip Morris announced it was considering "alternatives to maximize shareholder value" like splitting off the company's non-tobacco businesses. Smoking aside, the Dow's advance was led by companies that make stuff and sell stuff for consumers.

Procter & Gamble

(PG) - Get Report

,

Hewlett-Packard

(HPQ) - Get Report

and

Wal-Mart

(WMT) - Get Report

each rose about 3%.

The

S&P 500

did almost as well, gaining 1.6% to 1161.67, and is approaching its intraday high for the year of 1163.09. The

Nasdaq Composite

added 1% to 2023.63. The benchmark indices finished on a high note, unlike Wednesday, when an afternoon rise in oil sapped some of the momentum.

Breadth was extremely positive, volume was solid with 1.8 billion shares traded on the

New York Stock Exchange

, and other technical indicators looked good. With the election settled in favor of the perceived more pro-business candidate and oil prices on the decline, there's plenty of room to rally further barring some horrendous news on the economy.

Oil futures lost $2.06 to $48.82 and have now fallen 12% since hitting $55.67 on Oct. 25. Even as oil fell, the major energy companies rose, thanks in part to a buy call on

ExxonMobil

(XOM) - Get Report

from Deutsche Bank and expectation that the second term of the Bush administration will bring more benefits.

In a related aside, Morgan Stanley on Thursday joined the chorus of those

sounding a note of caution on tanker stocks like

Teekay Shipping

(TK) - Get Report

,

OMI

(OMM)

and

General Maritime

(GMR)

, which have doubled and tripled over the past year as increasing oil demand, especially in Asia, has sent tanker rates through the roof. But it's a lot easier to build more tankers than it is to find and pump more oil. Morgan Stanley analysts Ole Slorer and Mark MacLean see "smooth sailing now, storm brewing."

"We see danger signs over a 12-18 month horizon in spite of low post-hurricane inventories in the U.S. coupled with strong global oil demand (despite $50+/bbl crude oil), which should set up a firmer winter market," they write.

But new pipelines and more new tankers relative to the number being scrapped portend lower rates in the second half of 2005. "We view the energy shipping stocks as expensive at current levels due to considerable medium-term risk factors and high multiples on midcycle earnings."

Teekay gained 1.3%, OMI added 1% and GMR rose 0.6%.

The bond market ended about where it started on Thursday with the yield on the 10-year Treasury note at 4.07% ahead of Friday's October payrolls report. Two reports on Thursday put an upbeat cast on the labor picture. First-time filings for unemployment insurance last week declined more than expected to 332,000, and productivity growth was up just 1.9% in third quarter, the smallest rise since 2002. That could foreshadow companies having to hire more workers to keep growing. Unit labor costs, which reflect both hiring and wages, rose 1.6% in the quarter, the most in a year and a half.

With the markets expecting another one-quarter percentage point hike in the federal funds rate at next week's Federal Open Market Committee meeting, the question turns to the outlook for December and early 2005. In the futures market, traders are putting the odds of another tightening in December at about 50-50.

All of the most recent data will pale in comparison to the payrolls data for October and the same report next month. Mediocre job growth of about 160,000 jobs, as forecast, won't be enough to sway the

Fed

from its campaign of raising rates at a "measured" pace. And the same is true for December.

According to its most recently released minutes, the central bank is focused on the health of consumer spending as seen through retail sales, real estate and consumer confidence reports. The latest data shows some weakness but nothing falling off a cliff.

In the retailing sector, for example, chain stores sales for October were reported on Thursday up 4.1%, the best since May, and the International Council of Shopping Centers projected a similar 3% to 4% gain in November. Retail gains were biggest among those catering to teens and luxury shoppers.

Gap

(GPS) - Get Report

, which raised its earnings outlook, added 9%,

Neiman Marcus

(NMG)

gained 7% and

Target

(TGT) - Get Report

rose 1.9%.

In the past few weeks, the retail sector sold off as commentators predicted that stubbornly high gas and heating prices would sap demand. The Energy Department forecast that home heating bills would be 28% this winter, for example. The latest same-store sales figures erased some of those doubts.

"Valuations are depressed, capacity growth is slower, and while rising rates pose a threat, it appears to be minimal from a valuation perspective overall," Morgan Stanley's retail analyst team wrote in a report distributed Thursday.

Longer-term, problems loom as wages aren't growing as fast as spending and the savings rate last quarter hit the lowest ever. Consumer debt is also at record levels. "For now, this unrealistic and unsustainable rosy scenario will continue right through the holidays," predicts Richard Hastings at Bernard Sands.

In terms of consumer confidence, the next reading from the University of Michigan won't come until the end of next week, after the Fed meeting. October confidence dropped from September but an initially reported plunge was revised to a more modest decline. Scott Hoyt at Economy.com says the November reading will be closely tied to energy prices.

"A significant further increase in energy prices or an end to employment gains could push confidence down sharply," he wrote in a recent analysis. "By contrast, a significant decline in energy prices would free up spending power and boost confidence."

The real estate market continues to shows signs of cracking, if not cratering.

Lennar

(LEN) - Get Report

warned Thursday morning that it was having a variety of problems, including softening markets in Las Vegas and Southern California. Lennar dropped 0.7% along with most of its competitors.

Pulte

(PHM) - Get Report

lost 1.2%,

MDC

(MDC) - Get Report

fell 1.5% and

Ryland

(RYL)

dropped 1.3%. Luxury builder

Toll Brothers

was the exception, gaining 1.9%.

All in all, the warnings signs don't appear ominous enough to scare Greenspan and his crew, even if they are throwing up caution flags for some sectors. A bigger slowdown may in the cards for 2005.

In keeping with TSC's editorial policy, Aaron Pressman doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send

your feedback.