Stock Market Forecast – Stocks Rise On Trade Negotiation Optimism

The S&P 500 rallied 0.3% on Wednesday and recaptured the 200-day moving average for the first time in 2019.  The large-cap index was driven by gains in the Energy sector, which rose 1.81%, and real-estate which rallied 0.7%. Most sectors were in the green, except Utilities which bucked the trend and declined 0.35%. Small caps are starting to outperform large caps which is a sign of rising risk appetite.

The Dow Industrial average rose 0.46% and was the first of the major indices to push through the 200-day moving average. Stocks were driven by positive sentiment, as investors hope that a fruitful meeting on Thursday between the US and China could lead to a trade agreement.

Additionally, President Trump is expected to sign a spending bill that will be voted on by the House on Wednesday and the Senate on Thursday that will allow the US government to remain open following the February 15, the deadline for the current continuing resolution.

Inflation Remains Subdued

The Labor Department on Wednesday reported that US inflation remains subdued. US CPI came in unchanged in January for the 3^rd consecutive month. The rise was the smallest increase year over year in 18-months. This will provide the temporary ammunition that the Federal Reserve needs to keep rates unchanged.

The Labor Department reported that the Consumer Price Index was kept in check by cheaper gasoline, which offset increases in the price of food and rent. Annually, CPI increased 1.6% year over year which was the smallest gain since June of 2017. This is down from a year over year rate of 1.9% in December.

Core CPI, which excludes food and energy, increased by 0.2% month over month which was the 5^th consecutive month with the same increase. On a year over year basis, core CPI rose 2.2%.

New US Tax Law Reduced Revenues

The US Treasury Department reported on Wednesday that Federal Tax revenue dropped by 0.4% in 2018. This was the first full year that comes under the new tax law championed by the Trump administration. Total revenue was 3.33 trillion in 2018 down from 4.2 trillion in 2017. This pushed the US budget gap to 873 billion for the year ending December 2018, compared to 680.8 billion in 2017.

Risk Remains Neutral

The VIX volatility index increased on Wednesday despite the rally in the S&P 500 index. Generally, the VIX declines when stocks rise. This should tell traders that we have reached an inflection point.

The chart of the ratio of the IWM ETF versus the SPY ETF shows that the value of small-cap stocks versus large-cap stocks. Generally, during a bull market, small-cap stocks outperform large caps.  You can see that small caps began to rebound relative to large caps in mid-December, after tumbling. The ratio has now started to accelerate higher. This could be a sign that risk appetites are increasing.