Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S. (Photographer: Michael Nagle/Bloomberg)

The Higher the Wall of Worry, The Faster the S&P 500 Climbs It

(Bloomberg) -- The bull market’s resilience was hard to find fault with this week.

A constellation of risks that loomed on Monday, from trade tensions to the jobs report that wrecked equities last month, became reasons to buy by Friday afternoon. The S&P 500 Index ended up 3.5 percent on the week, volatility is rapidly abating and technology stocks are back at record highs.

The Higher the Wall of Worry, The Faster the S&P 500 Climbs It

Of course, the newsflow helped. Friday’s report showed bumper hiring without the prior month’s rapid wage gains. Donald Trump compromised on his tariffs. And a planned summit between the U.S. President and Kim Jong Un buoyed hopes of a diplomatic breakthrough on the Korean peninsula. Those developments have gone a long way to repair sentiment bruised by last month’s savage correction, restoring some of the composure that’s defined a bull market now heading into its 10th year.

“There was a feeling that the market was lost, now it seems that investors have more certainty,” Ian Winer, director of equities at Wedbush Securities Inc., said by phone. “The optimism that the economy isn’t at risk of overheating is a very welcome reprieve after all the volatility we saw last month.”

Busy Week

Investors began the week reeling from signs that the Federal Reserve may be faster on the draw when it comes to rate hikes and worry that Trump was spoiling for a trade war. But as early as Monday, signs emerged that the final policy on trade wouldn’t be as protectionist as many feared, a sentiment borne out Thursday when he signed an order full of carve-outs for key allies.

The trade angst helped domestically-focused small caps outperform, with the Russell 2000 surging more than 4 percent. Still, even multinationals in the Dow Jones Industrial Average managed to recoup last week’s losses, up 3.3 percent.

Friday’s jobs report went a long way toward restoring confidence that the Fed isn’t behind on inflation, as hiring topped 300,000 jobs while wage growth fell short of expectations. Each of the four main equity indexes rose at least 1.6 percent on the day. The Cboe Volatility Index fell to the lowest since Feb. 1, the day before the market selloff began.

What Our Economists Say:

Solid hiring gains and a lack of wage pressures reaffirm our assessment that the economic cycle remains vibrant, and has not entered its twilight phase. Similarly, contained labor costs will allow the Fed to proceed with tightening policy in a continued, gradual fashion. The economy is witnessing a classic mid-cycle hiring reacceleration, and a controlled Fed response should enable the cycle to ultimately surpass the record-long 40-quarter expansion of the 1990s.
-- Carl Riccadonna and Yelena Shulyatyeva, Bloomberg Economics
Read more for their full reaction note on the employment report.

And chart watchers have an extra reason for optimism. The S&P 500 just broke through its 50-day moving average for the first time this month, a key support level for roughly six months prior to last month’s swoon.

The Higher the Wall of Worry, The Faster the S&P 500 Climbs It

Against that backdrop, next week’s inflation report is one to watch. The consensus on consumer prices is for a 2.2 percent year-over-year increase in February, compared with 2.1 percent a month earlier. The data matters because of its implications for bond yields, which have been creeping higher and threaten to undermine the stocks recovery.

“If you get through the 3 percent level on the 10-year, and even with a better economy, I just believe it’s going to be harder for equities to sustain the type of upward momentum that was certainly true through January,” Mark Heppenstall, chief investment officer of Penn Mutual Asset Management, said by phone. “It’s not that I expect a big selloff in the equity market, I just think that the headwind of interest rates is real and a fundamental driver of valuations in equities.”

Of perhaps lesser concern, but still worth considering: the early rounds of the March Madness college-basketball tournament may see people distracted and trading less, according to Rhino Trading Partners’ Michael Block. And S&P 500 options expire on Friday.

“February was a tough month for all of us, but the market certainly was resilient going both directions,” Rich Guerrini, the chief executive officer of PNC Investments, said by phone. “It reacted to the news, but then I think the fundamentals came back in and said we’re still in a great place. I just think we’re going to see that type of movement in the financial markets certainly throughout 2018 and beyond.”

©2018 Bloomberg L.P.