A Busy Week Ahead
The global equity markets are trying to move higher but there are a number of make-or-break events due next week that could derail the budding rally. Top of the list is the US-China trade talks set to occur in Washington D.C. The US-China trade impasses has led the global economy to the brink of recesssion so traders and investors are wary of what may come from the meeting. The meeting, between Chinese Vice Premier Liu He and top Trump Administration trade officials, is not expected to produce a new trade deal but it is expected to produce a positive development and lead to further talks at some later date.
The risk with trade is that the talks will not result in positive advance in negotiation, that the talks will deteriorate and the threat of tariffs will be intensified. Tariffs, surcharges on imported goods, have already sapped several tenths of GDP from China, the US, and the world, if that threat intensifies we can expect equity markets to plummet in response.
After trade, the FOMC is the next biggest threat to the rally. The equities markets corrected at the end of 2018 as outlook for FOMC interest rate hikes intensified, they have since backed off their timeline and trajectory and that has allowed the market to begin its recovery. The data shows US activity is still strong, if acceleration is slowing, and inflation is well contained so a dovish tone is expected in the statement. Anything different, especially the threat of future interest rate hikes, could derail the budding stock market rally.
A Showdown in Washington
The US Government shutdown is yet another risk facing the equity market today. Now in the 6th week the shutdown shows no signs of abating. Rhetoric from the White House and Speaker of the House have set up a showdown that I think the Democrats can’t win; they can’t stop Trump from issuing a State of the Union from the Oval Office and obstructing immigration reform is not a label they can afford to bear. Regardless, continuation of the shutdown threatens US economic stability and GDP. Some top CEOs including Morgan Stanley’s and Goldman Sachs’ have stated serious damage could be done to the US economy if the shutdown doesn’t end very soon.
While trade, the FOMC, and the shutdown are all problems that could derail the market rally the most important even next week will be the earnings reports. Trade, the FOMC, and the shutdown are really only important for their potential affects on earnings, the earnings reports and the outlook for future earnings are what the market is valued on. At this time earnings growth is still on tap for 2019, and that growth is expected to accelerate by the end of the year, so the longer-term rally is still intact. Whatever happens between now and then is just noise (important, volatility inducing noise).