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Cloudy outlook for US stocks in 2019, mixed messages everywhere
US stocks finished a volatile week more or less flat as the government shutdown ended and earnings came in mixed.
Strategists said that the forecast for January and the balance of 2019 is cloudy, with a chance of rallies. Most are reticent to say whether the spring will bring sunshine or rain until terms of a deal between China and the US - and between the major American political parties - become clear.
"We have made some progress, it appears, on the trade front which is certainly positive," said Oliver Pursche, chief market strategist at broker-dealer Bruderman Brothers. "But the headwinds - just talking globally, from Brexit to the US government shutdown to tariffs - are still there."
Last Friday, US President Donald Trump finally reopened the government after a 36-day shutdown, but economists warned that damage has already been done to first-quarter economic growth.
Economists at brokerage Bank of America Merrill Lynch cut their projection for first-quarter growth to a relatively slender 2 per cent.
But this could be a temporary reprieve. Mr Trump warned that he would give Congress until Feb 15 to resolve differences on border policy or face another shutdown.
"The US government finally reached a compromise to open its doors for three weeks, after closing them for five, with the Senate passing a bill to end the shutdown," said analysts at S&P Global Ratings, in a statement.
"The longest partial shutdown in history, which started as a minor cold, began to feel like a nasty flu that had begun to spread across the states. The overall cost is likely worse than what we had previously expected."
Mixed messages are everywhere. Chip maker Intel warned that weakness in China would weigh on its growth this year, echoing warnings from other tech heavyweights such as Apple and Samsung.
But shares of other semiconductor companies, including Teradyne and Lam Research, rose after their slowdown was not as bad as investors expected.
Healthcare companies from conglomerate Johnson & Johnson to cancer drug specialist Bristol Myers Squibb have disappointed investors with their updates.
Industrial companies such as United Technologies, who were thought to be in the front lines of the trade war, have posted earnings ahead of Wall Street targets.
Stockmarket bulls are hoping that the corporate earnings slowdown is just a zig on the chart preceding another upward zag. They could get encouragement from reports this week.
Construction and mining machinery maker Caterpillar is likely to report pressure on its business from slowing economic activity in China, the world's most important market for both mining and construction.
But Caterpillar could also forecast benefits from Chinese President Xi Jinping's plans to stimulate economic growth.
Apple, whose shares came roaring back late last week, has a reputation for setting conservative targets and then topping them. Seldom have its targets for iPhone sales been so pessimistic, giving it ample room to deliver a positive surprise.
A long-term corporate earnings rebound likely depends on a rebound in global trade. Stockmarket bears point to the negative import and export data from China, still the world's workshop, as a sign that earnings growth is going to shrink further as the year progresses.
On global trade, the forecast is also decidedly mixed. Mr Trump has heralded great progress on trade negotiations with China. But Commerce Secretary Wilbur Ross said that the two sides remain "miles and miles apart".
"We are going to get more of a 'headline deal' than a comprehensive deal . . . but we probably do get something that makes both Trump and China winners, something well written and communicated," said Lorenzo Di Mattia, manager of hedge fund Sibilla Global Fund.
The US stock market is unusually jumpy. The broad Standard & Poor's 500 is roughly halfway between the lows of the near-bear market on Dec 26 and the highs of the near-death-experience bull market last July.
Most strategists said that it is entirely possible that it will test either - or both - those benchmarks as investors await the terms of the China deal and more details on Federal Reserve policy.
"The market is behaving the same way a very leveraged stock behaves . . . massive swings down-up-down as probabilities of different outcomes change, way before any outcome actually has time to materialise," said Mr Di Mattia.
Last week, stocks jumped on Friday after The Wall Street Journal reported that the Fed was considering slowing sales of its Treasury bond holding.
This is optimal development as it will likely further slow increases in mortgage rates and other Treasury-linked rates. But on the other hand, the Fed's sudden change of mood could be a sign that the central bank is convinced that an economic slowdown is at hand.
Investors are grappling with these two different scenarios: in one, the economy keeps growing without inflation forcing the Fed to hike rates. In the other, the Fed's decision to stop rate hikes comes too late and the economy goes into recession.
"Mood swings between a possible Goldilocks 2 and another recession alternates in investors' minds," said Mr Di Mattia.
Prepare for more mood - and stock - swings in the weeks ahead.