- The presidents of the U.S. and China helped fuel a solid year-end rally when they agreed to strike a trade deal in mid-December.
- Stocks are on track for their best December and fourth quarter in six years, if not longer.
- Strategists are positive on the stock market for next year, but see a consolidation phase in the first part of 2020.
With a trade deal nearly sealed, the runway is clear for stocks to head higher into year-end, and the market could continue to lift off into the first quarter before taking a pause, strategists said.
The mid-December announcement by the U.S. and China that they reached a phase one trade deal helped fuel the latest leg of the rally. President Donald Trump Friday said he had a "very good" talk with China President Xi Jinping about it, and the signing is being arranged.
As trade tensions cooled, the global manufacturing economy has also started to show signs of improvement, providing a boost to sentiment. The bond market, which had been sending scary signals, is no longer warning of a recession as yields rise. Against that backdrop, the Fed has stepped to the sidelines but is keeping policy tilted toward easing.
The market also shrugged off the impeachment of President Donald Trump this past week, on the assumption he will be acquitted of charges, and there will be no negative impacts affecting fiscal or monetary policy.
Stocks are now on track to see their best December in nine years, and best fourth quarter since 2013. The S&P 500 pushed through the psychological 3,200 level on Thursday and kept on going. It was up about 2.5% for the month and 28.5% for the year.
"The market is going to go up into the end of the year," said Alicia Levine, chief strategist at BNY Mellon Investment Management. "There's not a lot of pressure for selling because so few people had losses." This year, investors who sell could face large capital gains taxes. That contrasts sharply with this time last year, when the stock market was plummeting and reached a selling crescendo in the half day Christmas Eve session.
"You don't have the pressure to get rid of losing positions this year. Sentiment's gotten pretty bullish in the last few weeks," she said. "Now that the market is bullish, there is a real concern, I think that we are borrowing some of next year's returns."
Levine said the market could run into turbulence, in the first quarter, as the presidential election comes into focus during state primaries. The Iowa caucuses are Feb. 3, and New Hampshire's primary is held the next week. Super Tuesday, with more than a dozen primaries, is March 3.
"Whether it's a fundamental reason or not, I think the market will use that as an excuse to consolidate," she said. "The leading Democratic candidates have put out policy statements and economic plans that are not necessarily friendly to capital. Most of the Democratic candidates have said they're going to increase the corporate tax rate. If you increase the corporate tax rate, you're going to shave 1% off of S&P earnings for every 1% increase in the corporate tax rate."
But overall, she is positive on the market in 2020.
Barry Knapp, director of research at Ironsides Macroeconomics, also expects a consolidating phase next year, but he expects it to be closer to April.
"For me, global manufacturing and global trade, just stabilizing is a big tail wind for the next three or four months," he said. "The second one is the liquidity created by the Fed purchasing $60 billion in T-bills a month."
Knapp also said another positive is the wage growth that should help spur more consumer spending.
"Those three things are big positives until around April. We'll probably get a good correction around that point," said Knapp. "They're saying the $60 billion of Treasury bills are going to continue at least until the second quarter. That's the point I'd really be worried about."
Knapp said he was bullish a year ago as the market corrected. "A year later it's uncomfortable with so many people bullish ... I thought a little bit about taking some risk down but my fundamental case is pretty strong so I haven't done it," he said.
Levine said she is a little concerned about the bullishness, which can be a contrarian sign. "Now that the market is bullish, there is real concern I think, that we are borrowing some of next year's returns. Are we pulling them forward into this year?" she said.
There is little data in the shortened holiday week ahead. New home sales are Monday, and durable goods are Tuesday. The stock market closes at 1 p.m. ET that day, remains closed on Christmas Day and reopens for a full session Thursday and Friday.
10:00 a.m. New home sales
8:30 a.m. Durable goods
1:00 p.m. Stock market closes for Christmas holiday
8:30 a.m. Jobless claims