The story of Juan José Padilla must be legend within the Spanish bullfighting community. Blinded by a bull in one eye in late 2011 after badly losing his footing in a bullring, the matador made a stunning comeback to the arena about six months later, much to the utter shock of fans.
Similarly, Wall Street investors find themselves facing off with a bull of their own, one that is in its ninth year and, despite being beset by a cavalcade of concerns, appears on the verge of resuming the second-longest run since WWII.
That is perhaps much to the consternation of bears and the confusion of nervous optimist alike.
On Friday, the 13th no less, the S&P 500 index SPX, +0.11% finished above 2,800 for the first time since Feb. 1, piercing a psychological, round-number level that had proven a source of key resistance for the market since it stumbled badly into correction territory on Feb. 8.
Indeed, the S&P 500 finished Friday’s session 0.1% higher at 2,801.31, the Dow Jones Industrial Average DJIA, +0.38% closed up 0.4% at 25,019.41, while the Nasdaq Composite Index COMP, +0.03% mustered sufficient momentum to eke out back-to-back finishes at an all-time closing high at 7,825.98, up less than 0.1%.
The S&P 500 sits just 2.5% from its Jan. 26, record, while the Dow stands 6% short of its closing peak from earlier in the year.
The recent uptrend has come in fits and starts, but come it has, amid the aforementioned headwinds. Those factors include:
- Persistent fretting about posturing over trade between the U.S. and its partners across the globe. A concern that is benign at the moment, with China and the U.S. exchanging tariffs of 25% on some $34 billion of products last week, but some fear this could metastasize into something more disruptive to markets
- A tightening spread between short-term interest rates and their longer-term counterparts: Because lenders tend to demand richer returns for lending for a longer period, a shrinking of the yield curve, as bond investors refer to the yield differential between different maturing bonds, has raised questions about the economic outlook. The gap between the most closely watched 2-year and 10-year Treasury notes is at 24.9 basis points, or 0.249 percentage points, as of late-Friday, marking its tightest since 2007. On top of that, an inverted yield curve, where the shorter rate exceeds that of the longer has been an accurate predictor of recessions
- The Federal Reserve is walking a tightrope as it aims to normalize interest-rate policy without suffocating economic growth or fostering bubbles, or a recession
- Rising bond yields that, if occurring too rapidly, could stymie economic and corporate growth and hobble the stock market
- Late-cycle economic expansion that some bears fear must peter out and eventually end soon, even if the recent gains have been underpinned by President Donald Trump’s late-2017 corporate tax cuts
- Midterm elections that could reshape the balance of power on Capitol Hill
- A strengthening U.S. dollar DXY, -0.03% that has wreaked havoc recently on emerging-market economies that have dollar-pegged debts, which are serviced in local currencies
“The market has been able to grind higher and it’s been able to do so even with these headwinds,” Michael Arone, chief investment strategist for State Street Global Advisors told MarketWatch in an interview.
The State Street strategist views trade conflagration as a concern that may have fallen to the wayside even if it continues to be a situation that unspools over weeks and months.
“The trade discussion has been a bit longer than folks had been anticipating and it might be longer still — and a bit messier,” Arone said.
He added: “This week there seems to be a changing sentiment that much of the trade threat in terms of the escalation of the tariffs is being used as a tool to bring the sides together.”
In the end, sentiment may be improving as reflected by the stock market’s recent action; but there are many who have cautioned against being too complacent. Scott Minerd of Guggenheim and Ray Dalio, the founder of hedge fund Bridgewater Associates, appear to be warning that escalating trade disputes could still be a major problem for the market.
With the admonishment of those high-profile investors in mind, it is worth reflecting on the one-eyed Padilla’s comeback. Just a few days ago, the flamboyant picador suffered an even more horrific injury at the horns of another bull after once again losing his footing. This episode came about a year after being gored back in March 2017.
Observers can say what they will about bullfighting, or investing for that matter, but the lesson here may be that over long periods, the bull eventually wins.
Second-quarter earnings
Second-quarter earnings unofficially kicked off on Friday, but banks weren’t precisely the catalyst for the market move higher, with the financial sector, as measured by the Financial Select Sector SPDR ETF XLF, -0.44% finishing down by 0.4% even as JPMorgan Chase & Co. JPM, -0.46% beat analysts’ estimates. Still, analysts are estimating 20% earnings-per-share growth, up from 18.9% at start of the quarter, according to FactSet data. That is down from the first-quarter’s nearly 25% EPS growth.
Powell testimony
Federal Reserve Chairman Jerome Powell is set to deliver his semiannual monetary policy report to the Senate Banking Committee on Tuesday and is likely to testify in front of the House Financial Services Committee thereafter (though that hasn’t been confirmed).
The testimony comes a little over a month after the Fed raised interest rates on June 13 for the seventh time since the end of 2015. Powell’s comments are likely to add more dimension and texture to the institution’s monetary-policy strategy, as it looks to bring interest rates to a more normal, precrisis level and delever its asset portfolio, which became bloated to the tune of some $4.5 trillion during the height of the 2007-09 asset-backed fueled blowup.
