The S&P 500 closed up over 2.5% on the week, taking out a key level of resistance in the process. The index broke above its 200-day moving average and is once again trading north of 3000. This is quite remarkable considering the dismal fundamentals. The market continues to look through the weak current conditions and on to greener pastures on the other side of the virus. Still, the bricks in the wall of worry are growing once again, and we think it wise to consider how long the rally can last without taking a break.  
There is no doubt that the market is in a decisively cyclical mood. Industrials are outperforming utilities, discretionary stocks are outperforming staples, and copper is outperforming gold. Risk-on is back and pushing the market higher. In particular, we are starting to see real improvement out of the stocks hit hardest during the virus sell-off. We respect this momentum and acknowledge that confidence is being driven by a strong policy backdrop. The Fed has made it well known they will do whatever it takes to plug the temporary hole in the economy. On the hill, Congress is working on another round of direct stimulus while shoring up the Paycheck Protection Program. The market continues to believe this is enough to get to the other side.  
We also must acknowledge that interest rates remain incredibly low, and with no inflation in sight, they are likely to remain there. This makes stocks very attractive relative to bonds. There is plenty of cash on the sidelines to push equities even higher. So, while stocks may seem expensive when looking at the Price to Earnings ratio, they are cheap when considering the available alternatives.  
Yet, we must also consider that risks are growing that the market doesn't appear to be pricing in. Coming to the forefront this week is a rising level of confrontation with China. The administration released a document framing the Chinese Communist Party in its most adversarial light in years. It called attention to economic, security, and human rights grievances. While it stopped short of reneging on the recent trade agreement, it is clear that the countries remain on a collision course. For all the hand wringing over China in the last two years, we are surprised the market is taking this so well. We have our eyes out for threats and opportunities as this divergence grows.
We are also closing in on the election, and we must keep in mind that the outcome could present radically different futures for corporations. This is particularly true as it pertains to tax rates. The boost the market received from lower rates just a few years ago could potentially be reversed in short order. Right now, the market isn't taking this threat seriously. 
We respect the market's momentum, but we should be prepared for the risks that are materializing.  

Preston May, CBE®
Research Analyst

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