Stock Market Comment: What will Wall Street focus on in 2020?

• US equities tend to gain during election years

• Trade conflicts and negotiations to play a major role in 2020

• Q4 2019 earnings season begins next week!

• Wall Street indices trade at all time high 

Iran and the United States downscaled tensions in an attempt to avoid deeper military conflict. Situation in the Middle East is still likely to be on the watch for some time but investors should not forget about other major factors that may influence US equities this year. Those include Trade Wars, presidential elections and, of course, earnings.

Trade Wars

The Sino-US trade war was the main market theme of 2019 and while the two countries have reached “Phase One” agreement, the story is far from being over. Vice Premier Liu He, Chinese top trade negotiator, will head to Washington on January 13 and signing of the deal is scheduled for January 15. More details on the content of the deal are likely to surface following the signing. However, there is also another trade story worth watching - EU-US trade conflict. New EU trade commissioner, Phil Hogan, will travel to Washington next week to meet US Trade Representative, Robert Lighthizer. EU trade chief will aim to “reset” EU-US trade relations on contentious issues like US tariffs, EU digital tax or WTO rulings on illegal subsidies. 2020 started on a strong footing when it comes to trade as optimism dominates but one should keep in mind the most contentious issues in the Sino-US relations are said to be left for the “Phase Two” negotiations that should start soon. Apart from that, Donald Trump often said the European Union is a tougher partner to negotiate than China.

The United States runs a persistent trade deficit with the EU that is only deepening over time. In case of a major EU-US trade conflict, the US may target German goods with tariffs as the country is the biggest contributor to the situation. Source: Bloomberg, XTB Research

Its presidential elections year! 

The US presidential elections are another thing traders should have in mind while trading US equities this year. Looking at historical performance of the US equities during election years, bulls have reasons to cheer. Average Dow Jones gain in presidential election years after World War II is 4.86%. However, the stock market was more generous for the Republican candidates as average gain in 10 post-war elections that were won by Republicans sit at 6.3% against an average gain of 3.07% for 8 elections won by Democrats. However, if we remove 2008 from the equation, when Barack Obama won and Global Financial Crisis caused Dow to plunge 33%, average gain for 7 elections won by Democrats sits at 7.3%. Latest opinion polls show that Joe Biden and Bernie Sanders could defeat Donald Trump in elections while support for Michael Bloomberg is similar to the one incumbent president enjoys. Any other Democratic candidate would likely lose to Trump. So far, Joe Biden seems to be leading in Democratic primaries. However, the elections are still far off and everything could change as the case of Elizabeth Warren shows.

Joe Biden (top orange line) has a solid lead over Bernie Sanders (green line) and other Democratic candidates. However, nothing should be taken for granted as support for Elizabeth Warren (purple line) sank from around 50% to 10% in just three months. Elections will take place on Tuesday, November 3. Source: Bloomberg

Q4 2019 earnings season is just around the corner

Last but not least, one should not forget about regular market movers like earnings releases. Q4 2019 earnings season on Wall Street begins next week with reports from major banks. Earnings are expected to decline 1.5% YoY on the index level with energy and consumer discretionary sectors leading the slide with double-digit declines. Utilities are forecast to be the sole sector with a double-digit pace of earnings growth. 4-quarter streak of declining earnings may be worrying but it should be noted that US companies are expected to return to earnings growth in 2020 and increase profits in each quarter of the year. Below we provide you with a calendar of major releases scheduled for the next two weeks.

Interesting earnings releases scheduled for the next two weeks. Source: Bloomberg, XTB Research

2019 has been quite a tough year for the economy but it did not stop the US stock market indices from rallying over 20% (S&P 500 added almost 29%!). Technical situation is quite tricky as major indices - S&P 500, Dow Jones and Nasdaq - trade at all-time highs and it is hard to determine potential resistance levels going forward. Taking a look at the Dow Jones, one can see that the index is testing the upper limit of the market geometry marked by an ATH. The next resistance can be found at the 161.8% Fibonacci retracement level of the recent decline (29400 pts area). A point to note is that in case the index was to mimic average performance during election year won by Democrat (+3.07%, the lowest out of the aforementioned averages) the index would finish at around 29415 pts. Mimicking average performance from election years won by Republicans would put the index at 30335 pts by the end of the year!

Dow Jones (US30) retests an all-time high in the 28900 pts area. History shows that the index performs well during election years, no matter who wins. Falling in line with the historical average for elections won by Republicans, the index would break above the 30k mark for the first time in history. Source: xStation5