Where will stocks go next? It's all about trade

Posted January 20, 2019 7:02 a.m. EST

— 1. Trade peace: Wall Street is captivated by the US-China trade negotiations.

Investors have loudly celebrated recent hints of progress on ending the damaging trade war. News reports suggesting positive developments in the talks carried the Dow 500 points higher in the final two trading days last week.

The enthusiastic response in the stock market underscores how badly investors want this trade fight between the world's two most important economies to end.

"The trade war, and the weapons used in it, create distortions in the economy," said Mike Loewengart, head of investment strategy at E*Trade. "It has the potential to thwart global growth."

Concerns about the fallout from the US-China trade war conspired with worries about the Federal Reserve to send stocks plunging late last year. The S&P 500 took a 14% nosedive in the fourth quarter, its worst performance in seven years.

Trade war fears were reinforced in recent weeks by Apple's (AAPL) bombshell sales warning and the sharpest slowdown in US factory activity since the Great Recession.

Evidence of a true breakthrough in the trade negotiations could send stock shooting higher.

US stocks popped on Thursday afternoon following a Wall Street Journal report that said Trump administration officials were deliberating whether to lift tariffs on China. The rally lost steam as investors realized nothing official had been decided -- and the Treasury Department issued a statement undercutting the story.

The market bounced again on Friday after Bloomberg News reported that China has offered to go on a six-year "buying spree" of American products aimed at zeroing out its trade surplus by 2024.

All three major indexes rallied about 3% last week, their fourth consecutive weekly gain.

"The optimism of the past few days shows that it really comes down to this trade war," said Loewengart.

That means investors will be sorely disappointed if trade talks collapse. A breakdown in negotiations and outbreak of tariffs would only deepen lingering worries about a sharp slowdown in economic growth that squeezes corporate profits.

Clearly, investors will be glued to the high-level trade talks scheduled for January 30 in Washington between US officials and China's top trade negotiator Vice Premier Liu He.

'Unsteady' truce coming?

The two sides face a March 1 deadline before a 90 day ceasefire agreed to in December officially expires. It seems unlikely that negotiators can settle the deep structural issues that have vexed the rival nations by then -- if at all. However, analysts increasingly think the negotiating window will get extended.

Michael Hirson, Asia director at the Eurasia Group, believes a "limited deal" is "increasingly probable" in the coming months because President Donald Trump wants to calm investors and boost the economy before the 2020 election.

However, the trade peace may not be the kind that satisfies the China hawks within the White House.

"It will be an unsteady and incomplete truce, a deal that falls far short of addressing the deep issues between the two countries and economies," Hirson wrote in a report published late last week.

E*Trade's Lowengart said that while a broader resolution would be "ideal," the market would be happy with anything that pushes the United States and China back from the brink.

"Any incremental progress to move us towards an agreement will be embraced by investors," he said.

2. Davos time: The World Economic Forum's annual summit kicks off Tuesday in Davos, Switzerland. Every year, the event pulls in thousands of the world's richest and most powerful people, who take meetings and speak on panels in the European ski town.

US President Donald Trump has said he won't attend Davos this year because of the government shutdown. British Prime Minister Theresa May canceled her trip amid Brexit turmoil and French President Emmanuel Macron will also be skipping the event this year. But plenty of other high-profile individuals plan to be there, including German Chancellor Angela Merkel and Japanese Prime Minister Shinzo Abe. The theme for 2019 is "Globalization 4.0."

3. Earnings season: Last week was all about US bank earnings. Now it's time for other companies to report results from the final three months of 2018.

One theme this week could be the impact of the slowing Chinese economy. Investors will keep close watch on results from Wynn Resorts (WYNN), Ford (F) and Starbucks (SBUX), all of which have solid exposure to the Chinese market.

The big question is if problems identified by Apple (AAPL) extend more broadly. Earlier this month, CEO Tim Cook said that the company would miss its most recent target largely because of poor sales in China.

4. Economic indicators: Amid growing economic uncertainty, two major central banks will make decisions on interest rates this week: the Bank of Japan and the European Central Bank.

Any action would be a surprise. In Japan, short-term rates have been in negative territory since 2016. Meanwhile, the ECB has pledged to maintain interest rates through the summer of 2019. The bank wants to avoid severe volatility after ending its massive bond-buying program in December.

China will also report its GDP from the last quarter of 2018. Last quarter, the country posted its weakest quarterly growth since the depths of the global financial crisis. Market watchers will want to know if the trade war with the United States continues to take a big toll.

5. Economic data blackout: The blackout of some important economic data continues this week as the government shutdown enters its fifth week. US reports are the gold standard, and business leaders use them to plan investments and guide companies. The week ahead would have include these three from the Commerce Department: New residential home sales and revised building permits (Friday); Durable goods (Friday) and Gross domestic product by industry (Thursday).

6. Coming this week:

Monday — Wynn Resorts earnings, China's fourth-quarter GDP

Tuesday — World Economic Forum begins; Stanley Black & Decker (SWK), Johnson & Johnson (JNJ), Travelers (TRV), IBM (IBM) and Capital One (COF) earnings

Wednesday — Bank of Japan rate decision; Comcast (CMCSA), Procter & Gamble (PG) and Ford earnings

Thursday — ECB rate decision; Southwest Airlines (LUV), American Airlines (AAL), Starbucks and Intel (INTC) earnings

Friday — Colgate-Palmolive (CL) and Royal Caribbean Cruises (RCL) earnings