Stock Market Forecast – Trade Deal Hopes Push S&P 500 Higher; Targeting 2,875

Soft economic data and lower yields give stocks a lift
David Becker
Wall Street Bull - Finance

The S&P 500 index notched up solid gains on Friday, rising 1.09% and closing for the week up 2.5%. The markets bathed in optimism that a trade agreement between the US and China was getting closer. What is best for the market is that a deal comes to fruition but not for a while. Sentiment should continue to build as prices rise and investors fear they will miss the rally.

Once a deal comes to fruition, there will be those who sell the news, which might generate additional market volatility. The VIX volatility index, which measures the implied volatility of the S&P 500 index was down nearly 5% for the week. Softer than expected Industrial production on Friday follows a soft retail sales report, which might put a fed rate cut into the equation. All sectors were higher. Financial led the way higher and rallied 2.06% on the session. Surprisingly the FANG stocks and Apple were left behind. Semi-conductor stocks help lead the rally rising 3.75% this week.

The Data Continues to Show a Soft Patch

One month does not define a cycle, but a softer than expected Industrial production, report following weaker retail sales, is not uplifting. On Friday the Federal Reserve reported that Industrial production sank 0.6% in January, which was the first decline in the past 8-months.  To add insult to injury, December industrial production was revised lower showing a gain of 0.1% from the initial estimate of a 0.3% gain. Manufacturing alone dropped 0.9%, led by a slump in the auto sector. Autos fell 8.8% in January. Excluding autos, factory output fell 0.2%. Mining output edged up 0.1% in January. The output of utilities increased by 0.4%.

Optimism that the US and China will cut a deal in the near future is the next wall of worry after President Trump announced that he would sign a bill that would allow the government to remain open. In addition, Trump added that he was going through with an executive order that would allow him to immediately build a southern border wall. Democrats will contest the Presidents ability to use this money. The purse strings are held within Congress.

What was the Price of the S&P 500 index When the Trade Tariff Began

The weekly chart of the S&P 500 index shows that prices where near 2,875 (100 points higher than the Friday close) when Chinese trade tariffs started. Prices tumbled then rebounded and then tumbled and now have rebounded and a deal would likely put prices at or slightly above those levels. The question is where stocks will remain above that range, which will likely be determined by interest rates and earnings. With the Fed out of the way, while the economy slides through the soft patch, stocks will have the opportunity to test the all-time highs.

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