The Market Appears Unstoppable But Is It?

Even a downgrade of the US credit rating by Moody’s couldn’t derail the current momentum in the stock market Monday as the S&P clawed back all of the 60 points it lost at the open plus 5. The technicals have flipped with about 50% of S&P stocks now trading above their 50 and 200 DMAs. Sentiment has flipped from extremely bearish a few weeks ago to extremely bullish now.

But there are reasons to be concerned the market is ignoring some important things. For one, even though the trade war has deescalated, tariffs are still higher than they were and likely to hit earnings according to JP Morgan CEO Jamie Dimon. Combined with a 20-21 forward P/E, the market is setting up for a 10% correction in Dimon’s opinion. Bulls will argue that Dimon is generally cautious and that’s a fair point but his concerns are valid nevertheless.

In addition, interest rates are rising with the 30-year treasury kissing 5% Monday morning before backing off. Rising interest rates increase the cost of carrying debt which is a problem for our heavily indebted economy. More money needed to service debt means less money for spending and investment. In other words, higher interest rates inhibit economic growth.

The combination of the hit to earnings from higher tariffs, high starting valuations and rising interest rates suggest to me that the market is due for a breather even though it blew off the Moody’s downgrade on Monday.