If the stock market were football, then entering the fourth quarter it would be the bulls' game to lose, with most of the pregame question marks about their stamina and halftime worries over roster depth answered assertively — in the form of a big lead and few obvious weaknesses.
The S&P 500 hit another record high last week and is ahead by nearly 10 percent for the year, confirming its longer-term uptrend through August and now most of September — historically challenging months. It was joined in record airspace by the Dow industrials, a sign that the trade frictions between the U.S. and China have been more a psychological weight than direct hit on equity values.
New record highs are more bullish for the market's outlook than a warning, historically, though they do furnish a handy chance to assess the broader backdrop.
Volatility, credit signals, investor sentiment and corporate-profit trends all tilt toward a continued sturdy market. But at these higher prices, heightened sensitivity to global market conditions and the valuation of equities compared to bonds are pressure points that could cut into the bulls' lead in the fourth quarter or complicate the picture in early 2019.
Credit markets are firmly supportive of the equity strength, with high-yield spreads compressing to nearly their tightest levels of the year as Treasury yields lifted toward their highs. And projected S&P 500 earnings have held up quite well so far in aggregate, expanding the fundamental cushion under the market.
The Cboe Volatility Index has retreated below 12, not far above the floor of its long-term range — a sign of low financial stress and lots of offsetting up-and-down action among sectors keeping the tape stable.
The push-pull of strong and weak groups of stocks remains a feature of this market phase. Skeptics deride this as a "narrow" and therefore vulnerable market. But the majority of stocks are participating in the rally. It's perhaps more accurate to characterize this market as selective and rotational rather than inclusive and propulsive.
A turn toward defensive-sector leadership over the summer — with utilities, health care and consumer staples outperforming — kept the bears from cutting into the bulls' lead by much.