It’s Friday the 13th. If you’re suspicious (or excessively careful), you should avoid black cats, spiders, cracks in the sidewalk, or lakes where a camper named Jason drowned years ago.
But one thing you shouldn’t avoid—at least for now—is stocks, because at least over the last couple of weeks they’ve mounted a stealthy but solid rally.
The Standard & Poor’s 500 index is up more than 100 points since the end of June, and it’s now only 2.5% below its all-time high set January 26th. The Dow Jones Industrial Average has picked up nearly 900 points over the past 12 trading days, and is 6% off its all-time high.
This has happened despite a heating up of the trade war which Treasury Secretary Steven Mnuchin said is not a trade war, but only “trade disputes” with China. (More on him later.) Meanwhile, yields on ten-year Treasuries have settled comfortably below 3% (they yielded 2.84% around midday Friday) and the U.S. dollar index has climbed from below 89 in February to almost 95 Friday.
So, what’s behind it?
First of all, the economy remains strong. Last week’s jobs report showed an increase in employment of 213,000, slightly higher than the consensus, and a slight uptick in the unemployment rate, to 4%, as 601,000 more people entered the labor force. In my MarketWatch column, I warned we could be at the low unemployment rate for the cycle, which has presaged previous bear markets and recessions.
Hourly earnings are rising at a noninflationary 2.7% a year, but various Federal Reserve officials have warned they might have to raise the federal funds rate more than three times this year. That’s still no big deal–yet.
Second, S&P 500 companies have just started reporting earnings, which are expected to rise by 20% in the second quarter, but below the first quarter’s blowout 24.8% growth. At any other time, 20% earnings growth would be considered spectacular.
As the economy and earnings remain strong, what’s keeping stocks from hitting all-time highs? For now it’s still fear of a trade war with China, which, despite Wall Street’s rosy optimism, shows no sign of abating. In fact, in a little-noticed comment reported by Politico, Treasury Secretary Mnuchin said talks between the U.S. and China had “broken down.”
Given President Trump’s erratic, delusional behavior at the NATO summit this week (he blasted European allies for not paying enough on defense and then declared victory although he got no specific new commitments to beef up spending), one wonders how much he really understands the risk of tit-for-tat tariff increases with China.
Those chickens will surely come home to roost someday, but for now, markets still haven’t run out of luck, even on Friday the 13th.