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US Stocks: Boosted by Trade Deal, Better Economic Data, Solid Bank Earnings

The better-than-expected economic data demonstrated the resilience of the U.S. consumer in keeping the current economic expansion alive, and the solid corporate earnings from U.S. banks points toward the importance of the Fed holding interest rates at favorable price levels.
James Hyerczyk

The major U.S. stock indexes finish higher last week, boosted by a combination of the signing of the “Phase One” trade agreement between the United States and China, better-than-expected U.S. economic data and solid corporate earnings from U.S. banks.

The inking of the trade deal removed some uncertainty from the market at least over the short-run. The better-than-expected economic data demonstrated the resilience of the U.S. consumer in keeping the current economic expansion alive, and the solid corporate earnings from U.S. banks points toward the importance of the Fed holding interest rates at favorable price levels.

Last week, the benchmark S&P 500 Index settled at 3329.62, up 2.0%. It’s up 3.1% for the year. The blue chip Dow Jones Industrial Average finished at 29348.10, up 1.8%. In 2020, it’s up 2.8% and the technology-based NASDAQ Composite closed at 9388.94, up 2.3%. It’s up 4.6% in 2020.

U.S.-China Sign Long-Awaited ‘Phase One’ Trade Agreement

There were no major surprises in the terms of the trade deal signed on January 15. The terms were largely in line with expectations investors have been pricing into the markets since the deal was announced in mid-December. The main takeaway is that China will increase its purchases of U.S. goods and services by $200 billion over the next two years.

On the positive side, signing the trade agreement is a major step toward de-escalation of the trade tensions between the two countries. “It removes the near-term threat of new tariffs and raises the hopes for a more comprehensive deal to be achieved,” according to Edward Jones analysts.

However, there are issues that could become the source of volatility throughout the year. Tariffs on two-thirds of U.S. imports from China remain in place, and are not expected to be removed until after the 2020 U.S. presidential election. Furthermore, there remain concerns over the implementation and enforcement of particular aspects of the trade deal.

Although most of the uncertainty has been lifted, the markets remain vulnerable to the potential failure to meet the terms of the deal, which can create temporary setbacks and result in additional retaliatory tariffs. These could become the source of heightened volatility throughout the year.

Better-Than-Expected U.S. Economic Data

Strong economic data also lifted sentiment on Wall Street. Weekly jobless claims unexpectedly dropped by 10,000 to 204,000. Economists polled by Reuters expected a print of 216,000. Meanwhile, retail sales climbed by 0.3% in December, matching expectations. The Philadelphia Federal Reserve business index also jumped to 17 in January from 2.4 in December.

Consumer prices rose slightly less than expected in December and monthly underlying inflation pressures retreated, which could allow the Federal Reserve to keep interest rates unchanged throughout this year.

The U.S. Labor Department also reported its producer price index for final demand ticked up 0.1% last month after being unchanged in November.

Finally, U.S. housing starts soared nearly 17% in December to a 13-year high, according to a Friday release from the Census Bureau.

Solid Banking Earnings

Early in the week, stocks rose as J.P. Morgan Chase led bank shares higher on the back of strong quarterly results. J.P. Morgan Chase posted quarterly earnings and revenue that beat analyst expectations. The bank’s annual profits also reached record levels at $36.4 billion.

Morgan Stanley shares jumped 8% after massive beat on fourth-quarter profit. The bank said that fourth-quarter profit surged 46% to $2.24 billion, or $1.30 a share, compared with analysts’ 99 cent estimate. Revenue climbed 27% to $10.86 billion, exceeding the estimate by more than $1 billion.

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