From early April, the S&P 500 index rose 10% from a low of around 2581 to 2,846 on July 25th. That was within 26 points—less than 1%–of its late January all-time high of 2,872.87.
Since then, it slipped a bit to just above 2800, but then retraced its steps to close at 2827 Thursday.
The Dow Jones Industrial Average followed a similar trajectory, while the Nasdaq Composite and small-cap Russell 2000 indexes, which had healthy rallies of 22.6% and 14.3%, respectively, from their February lows, made new all-time highs in July. They, too, have slid in the weeks since and are beginning to inch up again.
The escalating trade war between the U.S. and China—and it’s no longer a question of “whether” we’re in a trade war; it’s how serious it’s going to be—has had an impact, particularly on the Dow, which includes giant exporters like Boeing and Caterpillar.
But 30% of the S&P 500’s revenues comes from overseas, and the big tech companies on the Nasdaq have huge international sales, too. Even the mostly domestic Russell, lately a haven for trade war-wary investors, would be hurt by the higher inflation punitive tariffs would unleash.
The big question now is, can the market get to new highs, and why does that matter?
On the technical side, it’s worrisome that the S&P came so close to its all-time high, then sold off. The S&P will need to make and hold a new all-time high for this bull market to remain intact, so if the bulls try and fail to top that 2872 level again, that would be a bad sign. The Dow’s failure to come within 1,100 points of its all-time high during its recent rally is particularly troubling.
But the most fundamental factor of all—interest rates—may become an even bigger issue.
On Wednesday, the Federal Open Markets Committee (FOMC) left the federal funds rate at around 2%, but upgraded its description of the economy to “strong” from “solid.” That sets the stage for another ¼-point rate hike in September and probably in December, making four this year.
President Trump, who loves low interest rates, has started to grumble about this, but Jamie Dimon, CEO of JPMorgan Chase, made an even bigger fuss about the Fed’s efforts to shrink its $4 trillion-plus balance sheet. Dimon said that move could backfire on the economy or even cause a market panic. Higher inflation (perhaps from trade wars?) would likely cause the Fed to raise rates faster, too
If that happens and the S&P doesn’t hit new highs in the fall, this bull market may be much closer to its end than we thought.