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Bulls awaiting progress on trade agreement
US stocks are breaking records for the first time since the summer, and a strong batch of earnings or an update on US-China trade negotiations later this week could bring more record highs.
Stocks surged to record highs last week on the back of the jobs report, a US Federal Reserve rate cut and solid corporate earnings results. This week, the bulls await progress on the final item on their wish list - a trade agreement.
Both the broad Standard & Poor's 500 and the tech-heavy Nasdaq Composite finished at their highest ever levels. The Dow Jones Industrial Average is a few points away from its record high for the first time since July.
The stock market's major wobbles last week were all related to the trade deal. Since US President Donald Trump unveiled the so-called "phase one" deal last month, there has been a mood of anxious anticipation.
Reports that the two sides would formalise the deal at the Asia Pacific Economic Conference meeting, originally scheduled in Chile, stoked a rally early last week. But hopes were quashed after the Chilean government was forced to cancel the summit due to ongoing anti-government protests.
Another selloff was prompted by a Bloomberg News report that the Chinese government did not anticipate reaching a substantive deal with Mr Trump.
Wall Street strategists have warned for some time that the phase one deal Mr Trump promised is a "skinny" or "mini" version of the comprehensive deal originally envisioned.
The two sides have hinted that an initial deal would see China buying more agricultural goods and the US lifting some of the recently-imposed tariffs. Even that would be better than nothing, in the eyes of the bulls.
But Oliver Pursche, chief market strategist at broker-dealer Bruderman Brothers, said the latest reports suggest the deal could be even more cursory.
The bare minimum to make a deal market positive is some tariff rollback, he said. Anything less than that would rattle the market's confidence in economic growth - data last week showed the US manufacturing sector contracted again in October - and confidence in the whole Trump economic programme.
"If there's a non-deal or a very skimpy deal, market participants might have to start thinking about how much of distraction is impeachment going to be for Trump and the administration to focus on anything else," said Mr Pursche.
Mr Trump is railing against House Speaker Nancy Pelosi and her impeachment inquiry. For Fed chairman Jerome Powell, that means the heat is taken off him for a while.
Mr Powell's board cut rates for the third time this year midweek, but also indicated that there would not be any further rate cuts in the near term, a repudiation of Mr Trump's angry tweets demanding more action from the central bank.
Economists said the Fed's analysis that a "mid-cycle adjustment" - a temporary reversal of the 2018 hiking policy - rather than a complete change of course was vindicated by the strong data.
"The job numbers should make them feel comfortable with a pause and give them more confidence that the dovish pivot since earlier in the year is supporting the labour markets and the broader economy," said strategists at brokerage Bank of America Merrill Lynch Global Research.
Economists at Swiss bank UBS said the central bank could cut rates again in 2020, but that Mr Powell's board has set the bar relatively high, meaning growth would have to slow radically.
Earnings reports last week from Apple, Facebook and others, suggested that the US consumer is continuing to spend hand over fist even as activity stalls in the manufacturing sector. Similar strength from consumer-oriented companies such as Walt Disney and smart-phone supplier Qualcomm this week could perpetuate the stock rally.
In the intermediate term, Wall Street strategists anticipate volatility because of impeachment and presidential-election doubts.
Predictions markets, where traders place bets on future events, are showing an overwhelming likelihood that the House of Representatives will impeach Mr Trump by March 2020, but odds that he will be removed from office by the Senate are very low.
Outside the universe of "managed care" or health insurance stocks, the market is not reflecting the likely effects that a change in administration would have on stock prices, said strategists at brokerage Goldman Sachs. They said the elections have implications for both earnings and valuations.
On the earnings front, promises from Democratic presidential candidates to roll back corporate tax cuts would reduce 2021 Standard & Poor's 500 earnings by 11 per cent.
Valuations, or the average level that stocks trade as compared to earnings growth rates, could fall simply because of increased uncertainty about what government policy will be.
Other radical shifts in policy, outside the healthcare sector, proposed by Democratic candidates include the "Green New Deal" and a related shift away from conventional fuel sources.
For now, the focus is likely to be on the trade deal, and on the earnings reports.
"Whether we're going to break out northward is probably going to be because the economy is doing better and earnings start rising," said Jim Paulsen, chief investment strategist at the Leuthold Group. "That's the overwhelming elephant in the room."