3 Nov

Dow Jones and S&P 500 Await Big Trade Deal News

WRITTEN BY Mohit Oberoi, CFA

Last weekend, President Trump tweeted about “Something big.” As things turned out it was about the killing of ISIS leader Abu Bakr al-Baghdadi. Meanwhile, apart from crude oil, Baghdadi’s death didn’t have much impact on other asset classes. That said, equity markets have been strong in Q4. While the S&P 500 (SPY) hit a record high this week, Dow Jones Index (DIA) is flirting with record highs. Apple, Microsoft, Facebook, Alphabet, and Amazon have respectively gained 64.1%, 43.1%, 47.7%, 23.0%, and 19.3%. Now, to sustain the momentum, markets await another big news on the China trade deal from President Trump.

Markets: Dow Jones Index and S&P 500

US equity markets have defied pessimists any victory in the fourth quarter so far. Looking at the macro picture, the Fed did its bit by cutting rates by another 25 basis points. Elsewhere, economic data has been reasonably strong. Earlier in the week, US third-quarter GDP, as well as October nonfarm payroll, shattered expectations. China’s slowdown concerns too eased with the IHS/Markit manufacturing PMI surging to the highest level since February 2017.

Markets have been strong this year and the Dow Jones Index and S&P 500 have respectively gained 17.2% and 22.3% YTD (year-to-date). On the micro-level, its been a decent earnings season. Amongst mega-cap tech companies, Apple (AAPL), Microsoft (MSFT), and Facebook (FB) posted better than expected earnings. However, Alphabet (GOOG) and Amazon (AMZN) failed to impress with their earnings.

Trade deal news

Now, as the earnings season wraps up, markets’ attention can shift to the macro picture. Notably, after last month’s rate cut, even Fed chair Jerome Powell put the ball in Trump’s court. Apparently, Trump attaches great importance to market returns and frequently tweets about Dow Jones and S&P 500. Now, there are several ways that Trump can support a market rally.

The most important announcement that markets can expect from Trump would be on the US-China trade deal. Notably, the US-China trade war has been looming over the markets. Incidentally, on October 31, both the S&P 500 and Dow Jones closed in the red despite Apple’s stellar earnings. That day, there were reports that some Chinese officials have doubts about a long-term US-China trade deal.

Trade deal news could lift Dow Jones Index and S&P 500

Over the last couple of days, some optimism has been building up about the US-China trade deal. CNBC reported that “China said Friday that it has reached a consensus with the U.S. in principle after a phone call among high-level trade negotiators this week.” Reuters reported that Trump looks optimistic about phase one of the trade deal and is even thinking about signing the deal in Iowa.

It might be up to Trump now

With the earnings season wrapping up, and the Fed virtually putting the ball in Trump’s court, trade deal news could drive the markets in the short-term. While the S&P 500 has hit new highs and Dow Jones is nearing its record highs, the rally might lose steam unless we see some real traction in the US-China trade deal. Can Trump come up with another “Big news” on the trade deal?

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