Stock Market Forecast:
- The S&P 500 climbed to record levels following President Trump’s address to the nation in which he sought to deescalate tensions with Iran
- With the threat of further conflict reduced, stocks may shift their focus to two key events next week, the Fed’s repo operations and the US-China trade deal signing
- Will the Stock Market Crash in 2020?
Stock Market Forecast: Stocks Soar After Trump Speech, Fed and Trade to Take Focus Next Week
The S&P 500 marched confidently to all-time highs on Wednesday following President Trump’s address to the nation. In his remarks, President Trump sought to deescalate the conflict with Iran, seeking to avoid further military action. Relieved, stocks soared as the uncertainty and threat of major engagement was reduced which may allow the market to shift its focus to an upcoming announcement from the Federal Reserve and yet another episode in the US-China trade war saga.
S&P 500 Price Chart: 1 – Minute Time Frame (January 8) (Chart 1)
To that end, the Federal Reserve is set to release its schedule for further repurchase agreements operations next Wednesday. As I noted last week, many analysts believe the Fed’s balance sheet expansion has been a primary driver of recent equity strength. Consequently, any indication that the central bank will decrease, pause or halt its liquidity injections could seriously undermine the S&P 500 and other US equities.
S&P 500 Price Chart: 4 – Hour Time Frame (December 2019 – January 2020) (Chart 2)
With that in mind, the latter half of next week is shaping up to be a crucial time for the stock market as the United States and China are set to meet at the White House to sign the “Phase One” trade deal agreement the following day. Since the deal was announced on December 12, the S&P 500, Nasdaq and Dow Jones have been on a nearly unabated run higher – suggesting much of the deal has already been priced into equity valuations.
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With specifics of the deal alarmingly scant, the market could witness a “buy the rumor, sell the news” phenomenon as details of the deal are shown upon signing. If the deal underwhelms market expectations, or it lacks hard numbers or enforcement clauses, the market would likely reassess the equity gains posted after the announcement and readjust valuations accordingly. This would also lend more gravity to “Phase Two” rumors, a tool the Trump administration has employed throughout its tenure.
( 16:01 GMT )
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Coupled with the possibility of the Fed rolling back its balance sheet expansion, there is a real possibility the stock market will have two crucial drivers behind recent strength undermined when expectations meet reality. Consequently, traders should take stock of their positions and ensure they are properly hedged, and stops have been set. In the meantime, follow @PeterHanksFX on Twitter for updates on the various US equity indices.
–Written by Peter Hanks, Junior Analyst for DailyFX.com
Contact and follow Peter on Twitter @PeterHanksFX