S&P 500 touches 3,000 as stock rally powers on
WASHINGTON: The stock market hit a new high in its decade-long rally on Wednesday, as the benchmark S&P 500 stock index traded above 3,000 for the first time.
Investors cheered the potential for an interest-rate cut, which would make stocks more appealing. In prepared testimony before Congress on Wednesday, Jerome H. Powell, the Federal Reserve chair, raised concerns about a global slowdown hurting the United States, laying the groundwork for a cut later this month.
The weak outlook for growth is partly a result of the trade war, which the central bank recently said could discourage business spending and may be contributing to a manufacturing slowdown. That also has the potential to hurt the stock market should it turn out to be worse than anticipated, or if the Fed’s policy moves aren’t enough to offset the slump.
But right now, stocks are in a sweet spot as the economy and corporate profits continue to grow and borrowing costs seem likely to come down.
“You’ve got some modest growth, you’ve got moderate inflation, you’ve got a decent labor 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. That makes stocks look more attractive to 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.
The S&P 500’s gains on Wednesday were small. But 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 percent 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 percent this year, Apple almost 28 percent and Facebook about 52 percent.
Tech companies have some of the highest capitalizations in the stock market. (Microsoft is worth more than $1 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 percent 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 percent 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 American 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 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 Mr. Wren of Wells Fargo. “More trade negativity, that’s a headwind for the global story.”