U.S. stock benchmarks, having closed out a second straight weekly gain that has helped to reverse much of the recent weakness in major indexes, are near record levels. Uh-oh?
The recovery—the latest example of investors using any slight pullback as a buying opportunity, thereby prohibiting more pronounced pullbacks—comes at a time when uncertainties about the economy are growing, the government faces some key deadlines with major financial implications, and when the situation with North Korea remains both unclear and tense. In addition, markets just entered the month of September, which is historically the worst of the year for market performance, with the Dow averaging losses of about 1.5% over the past 20 years, according to Bespoke Investment Group data.
Still, investors and analysts continue to see a positive backdrop for the market over the longer term, but Wall Street’s prospects until these issues are resolved look a lot more uncertain.
Consternation around politics, worries about lofty equity valuations, and uneven economic data forming a kind of perfect storm—and that is excluding the literal storm that rocked the Houston area over the past week, the full economic fallout to which remains unclear.
“We’ve had a tremendous recovery over the past couple of weeks, one that pushed the VIX down to 10. As that happens we get into an overbought situation, and I don’t see us as having the ability to go much higher,” said Donald Selkin, chief market strategist at Newbridge Securities.
Selkin was referring to the CBOE Volatility index VIX, -4.34% a measure of market uncertainty, which fell 10% over the past week, dropping to 10.14. That level is extremely low by historical standards, and not far from the record lows it carved out earlier this year.
Over the past week, the Dow DJIA, +0.18% rose 0.8% while the S&P 500 SPX, +0.20% added 1.3%. The Nasdaq Composite Index COMP, +0.10% did even better, climbing 2.7%, in its biggest one-week percentage gain since December. That rally that returned it to record levels, while the S&P also moved within striking distance of records.
The gains took major indexes back above key levels. The S&P returned above its 50-day moving average, as did the Russell 2000 RUT, +0.59% which had been trading below its 200-day moving average at the start of the week. The 200 day is a closely watched long-term technical indicator that is considered a bearish sign if an asset falls below that average.
As for the so-called breadth of the market. At current levels, 55.4% of S&P 500 components are above their 50-day moving average, up from 44% on Aug. 30, suggesting that more stocks are returning to an uptrend after the downdraft mid August appeared to dent the market. A wider array of stocks performing well is seen as one of the clearest indicators of market health.
Major indexes rose modestly on Friday despite the August payroll report coming in below expectations, as some investors concluded that the tepid data meant the Federal Reserve was less likely to be aggressive in raising interest rates over the rest of the year. That would be supportive for stocks, even though it would be a negative if the data pointed to a labor market—and economy—losing steam.
“There’s still a good backdrop for stocks,” Selkin said. “Economic growth looks good, and the Fed appears to be out of the picture for raising rates in December. But you still have the debt ceiling coming up, a fight over the budget that is compounded by Trump’s crazy insistence on building the wall. What that all means is that the market is vulnerable and will look for any excuse to go down.”
Government deadlines will be a major focus for investors in coming weeks, and the Labor Day holiday on Monday could mean lighter trading volume over the rest of the week, which could exacerbate market volatility at a time when the U.S. market is the world’s most expensive, by at least one calculation.
The federal debt ceiling must be raised by late September. A spending bill also must be approved by Sept. 30 to avoid a government shutdown. President Donald Trump has said he wants a wall on the border between Mexico and the U.S. to be funded as part of any deal to keep the government open.
“It’s rather unusual that we would have two major issues going on at the same time, but we have one of the worst natural disasters in U.S. history occurring at the same time as these deadlines. These risks are starting to come into focus, and investors are taking notice,” said Peter Andersen, chief investment officer at Fiduciary Trust Co. “I remain optimistic on equities, but I do think we have to have a rationality check given what has happened and is coming up. Markets are going to be a little more shaky in the weeks ahead.”
In what could be a sign of how investors view the prospect of stocks, an unscientific poll comparing bitcoin BTCUSD, +3.72% to the Dow indicated that more than half of respondents expect the digital currency to hit $30,000—a target it would have to rise fivefold to meet—before the blue-chip average hits 30,000, a level it is less than 30% below.