U.S.-China Trade Deal, One Week Later

While the broad outline of a negotiating period was a positive takeaway from the trade agreement between Presidents Donald Trump and Xi Jinping at the G-20 summit, details remain elusive. Headlines following the meeting signaled a meaningful cooling of tensions as the Trump administration put a hold on further tariff increases during the negotiating period, and both sides raised their commitment to making progress on key issues. However, conflicting details contained in official statements and administration comments from both sides reminded markets of the potential challenges to finding common ground. Both sides continued to express optimism that a deal can be reached, and we remain optimistic as well; however, a number of tricky hurdles remain, and negotiations, even if successful, are likely to go through rough patches as both sides push for the best possible deal.

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Retest

We view last week’s market decline as a retest of the October–November lows. The S&P 500 Index fell 4.6% last week, leaving the index in line with the low of the autumn correction and 10% off the September highs [Figure 1]. Losses were driven primarily by three issues: the risk that U.S.-China trade talks fall apart, concerns about a Federal Reserve (Fed) policy mistake, and sharply lower oil prices, all of which contributed to increasing concerns about slowing global growth or potential recession. This week, we summarize our views on these issues and discuss prospects for a potential stock market rebound based on technical analysis.

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Strong Week Ahead of Big Weekend

It was a great week for the stock market. The S&P 500 Index rallied 4.9% last week, leaving the index less than 6% from its record high, on September 20, 2018 (excluding today’s gains) [Figure 1]. Gains were driven by increasing optimism (now proven to be warranted) for progress on U.S.-China trade talks at the G20 summit over the weekend and a more dovish outlook from Federal Reserve Chair Jay Powell (see today’s Weekly Economic Commentary for more). This week we share our thoughts on these major market-moving events and reiterate our positive stock market outlook.

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Fed Shows Flexibility

Last week, dovish language from the Federal Reserve (Fed) fueled one of the strongest rallies in U.S. stocks this year. On November 28, the S&P 500 Index posted its biggest daily gain since March and the U.S. dollar dropped the most in two weeks after Fed Chair Jerome Powell said current interest rates are “just below neutral,” referring to the point where monetary policy is neither accommodative nor restrictive for the economy.

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