The stock market hit a new high in its decadelong rally on Wednesday, as the benchmark S&P 500 stock index traded above 3,000 for the first time.
Investors are cheering the potential for an interest-rate cut, which would make stocks more appealing. In prepared testimony before Congress on Wednesday, Jerome Powell, the Federal Reserve chair, raised concerns about a global slowdown hurting the United States, laying the groundwork for a cut later this month.
In essence, investors are celebrating a weak outlook for growth as a result of the trade war, which the central bank recently said could discourage business spending and may be contributing to a manufacturing slowdown.
Few analysts expected the index to reach 3,000 so soon, but many see reasons for the gains to continue.
“You’ve got some modest growth, you’ve got moderate inflation, you’ve got a decent labour market, and you’ve got valuations in the market that aren’t stretched,” said Scott Wren, senior global equity strategist at the Wells Fargo Investment Institute.
Despite the prospect of weaker growth, falling interest rates lift stocks in two ways. They lower the returns on new investments in bonds, the main alternative to stocks for many investors. A rate cut also makes it cheaper for consumers and companies to borrow, and that can buck up economic activity and help corporate profits.
Large, round numbers can occupy an outsize role in the minds of investors and analysts, if only because they make it easier to keep track of the often random meanderings of markets. And this one is a timely reminder that, despite all the worry about the effect of a trade war and possible economic slowdown and the lost tailwind of the 2018 corporate tax cut, the stock market is having a remarkably good year.
The S&P 500 is up about 19 per cent in 2019, after already enjoying one of the longest bull markets on record. Since the climb began in March 2009, the index has more than quadrupled.
Stocks have also benefited from the strong performance of giant tech companies. Microsoft is up about 34 per cent this year, Apple almost 28 per cent and Facebook about 52 per cent.
Tech companies have some of the highest capitalisations in the stock market. (Microsoft is worth more than $1 trillion [Dh3.7 trillion].) Such large valuations give these tech giants significant influence over the S&P 500.
That’s not to say the rally this year has not had some rough spots.
In, May the S&P 500 tumbled 6.6 per cent after trade talks between China and the United States suddenly fell apart amid public accusations and new tariffs.
Technology firms are linked to China on multiple points, from networks of Chinese factories they rely on to churn out smartphones and buy their microchips, to the large and growing base of customers in the country, which is one of the world’s largest groups of consumers of technology products.
The information technology sector of the S&P 500 — which includes Apple and Microsoft — tumbled nearly 9 per cent in May as the White House shifted its focus to the transfer of technology from the United States to China, and announced measures to block US companies from doing business with Huawei, the giant Chinese telecommunications equipment-maker.
That decline ended only after members of the Fed began to talk about their willingness to cut rates. More recently, the easing of tensions after President Donald Trump and his Chinese counterpart, Xi Jinping, met at the Group of 20 summit in Japan has also helped.
Still, few think that stocks would be impervious to negative developments in the high-stakes negotiations between Beijing and Washington.
“Global growth is the issue here,” said Wren of Wells Fargo. “More trade negativity, that’s a headwind for the global story.”