This week in the stock market has been a very slow news week.
Also in this week’s news, Jerome Powell, Chairman of the Federal Reserve, spoke to 60 Minutes on Sunday evening to discuss the Federal Reserve policies and the current state of the economy.
With the exception of these two news stories, there hasn’t been a ton of newsworthy items this week.
What happened to a China Trade deal?
One of the most popular news stories from past two months was the promise of a China trade deal. If you look at this week’s headlines, there is little to no new information about a trade deal. This makes me believe we’re not going to have a China trade deal anytime in the next month or two.
So, with a slow news week it seems as though investors are waiting for some catalyst to move the market in one direction or another. Today, the S&P 500 Index touched the $2817 price level for the first time since October. I see the S&P 500 Index hovering around this level and continuing to consolidate within the $2780 to $2820 for the time being.
So with all of that in mind, what’s going to be the next Catalyst in the market? Which way is the market headed next?
Potentially positive catalysts for the stock market
Favorable trade deal for the US with China
If we are able to come to a trade deal agreement with China that is favorable to the United States, that would be great for our stock market.
For a trade deal with China to be favorable to the US it would need to protect our intellectual property rights and would also have some sort of a trigger for automatic tariffs if the Chinese don’t comply with the agreement. This would be the absolute best case scenario for the United States.
However I don’t think an agreement like this will come to be anytime soon. Xi Jinping, President of the People’s Republic of China, wants to maintain an appearance of strength for China. For this reason, I don’t think they’re going to make any concessions to United States any time soon.
According to Robert Lighthizer, we’re still a ways off when it comes to a favorable trade deal for the US.
Better than expected earnings
The second potential positive catalyst would be a positive earnings cycle in the first quarter of 2019.
Fourth quarter earnings from 2018 turned out to be better than expected and I believe this gave investors some confidence to continue to ride the market up in January and February.
If first quarter earnings are better than expected in the market this could be a positive catalyst for the market as well. It’s possible first quarter earnings go well, as some of the economic numbers we’ve seen are not quite as disappointing as expected, namely fourth quarter GDP growth, suggesting that perhaps Wall Street overreacted to slowing growthg. The worst economic numbers we’ve seen thus far of those of the non-farm payrolls added in February.
Personally I’m not too optimistic of either of these two scenarios playing out.
Potentially negative catalysts for the stock market
Worse than expected earnings
The first potentially negative catalyst would be if companies have worse than expected earnings in the first quarter. If we see earnings numbers come in below expectations this would likely drag the mark down.
Earnings estimates for the first quarter have declined for the S&P 500 as a whole, with estimated earnings for the index at -3.4% as compared to the previous year. In addition, there have been 76 companies in the S&P 500 Index that have issued negative EPS guidance as compared to 22 companies issuing positive EPS guidance. (Only 103 companies in the S&P 500 have issued guidance).
It’s important to pay attention not just to EPS results, but to the guidance we get from companies going forward into the second and third quarters of 2019.
Trade talks sour, and the US slaps more tariffs on China
Another potentially negative catalyst could be if the United States growing frustrated with the negotiations with China and decides to raise tariffs. Remember that President Trump delayed automatic tariff increases that were scheduled to kick in on March 1, 2019.
If this were to happen, it’s very likely China would raise their tariffs on American products as well. Much of this has to do with how well the negotiations go and if the two sides can at least agree on some sort of a framework of a trade deal moving forward.
Economic data is disappointing
A third catalyst would be if economic data continues to point to negative growth and growing in unemployment. If we begin seeing unemployment numbers rise, that could spook investors as rising unemployment tends to be an indicator of potential stresses in the economy.
In addition, the Federal Reserve Bank of Atlanta projects first quarter GDP to come in under 0.5%, which surely would be negative for investors.
Federal reserve raises interest rates
Finally, a fourth catalyst could be if the Federal Reserve does decide to raise interest rates this year. As I mentioned in my previous article, many investors are pricing in a rate cut this year.
If the Federal Reserve decides to raise interest rates, it would be due to the threat of inflation in the economy while unemployment rates remain low.
Overall, I believe the potentially negative catalysts are more likely to occur and impact the market. I believe that we’re going to see a downside move within a month or two, given that the recent market rally has been a little too hot in the current global economic backdrop.
However, it’s not outside the realm of possibility that we get positive news that could drive the market to all time highs before beginning to hit some resistance.
These are just a few of my thoughts on what I believe could impact the market moving forward. What catalysts are you watching out for in the market?