Stock bulls face two headwinds now

LAST week, US stocks finished at record highs as a rate cut from the European Central Bank (ECB) and a strong jobs report gave stock bulls a second wind.

The momentum of the latest bull run could carry the market higher for another week. Having closed less than 100 points away, the Dow Jones Industrial Average is almost sure to test the 17,000 level. If they are to run much further, however, the bulls must fight two headwinds: valuation and rising interest rates.

As anticipated, the ECB cut deposit rates for banks below zero, effectively making it cheaper for lenders to give loans than to sit on reserves. This sparked the late-week rally, and the jobs report supported it. A higher-than-forecast 217,000 jobs were added to payrolls in May and the unemployment rate held steady at 6.3 per cent. While the four-month aggregate of jobs added was the highest since the 1990s, what observers such as Dallas Federal Reserve president Richard Fisher have called "structural" problems persist. A low participation rate still shows that millions have…