Waiting on a ‘Deal or No Deal’ Catalyst

After the brutal Thanksgiving week in the markets, where stocks lost about 3.5% across the board, this week we saw a robust rebound.

Stocks in the S&P 500 are on pace for an approximate 4% gain this week, effectively erasing the holiday-week selling. The huge sell-off in the oil patch, along with a rising U.S. dollar and fears over the strength of holiday sales teamed up to push stocks lower in the week ended Nov. 23.

Going into this week, the market was awaiting the outcome of two major catalysts. The first catalyst was Wednesday’s speech by Federal Reserve Chairman Jerome Powell at a luncheon at The Economic Club of New York. Here, the bulls definitely got what they were looking for, and then some, as Powell was even more “dovish” than anticipated.

The Fed chief clarified his “hawkish” comments from early October when he said rates were “a long way from neutral.” Powell now thinks the current level of rates is just below the neutral range. Now, what that means in plain English is that Powell isn’t going to be hellbent on raising rates regardless of the data.

And my assessment was basically confirmed by Powell at the speech, since he stated in no uncertain terms that future rate hikes were not on a pre-set path, and that the Fed could slow down if circumstances required it. This central bank version of “virtue signaling” about rates is what really caused the market to explode higher on Wednesday, with the Dow surging 618 points, or 2.50%, for one of the best days in markets in quite a while.

The second catalyst bulls are eyeing this week is a game of “deal or no deal” between President Trump and Chinese President Xi Jinping on trade at the G-20 summit. The outcome of the scheduled meetings between the two leaders probably won’t come until Saturday, so we’ll have to be patient until then. However, what the markets are expecting from the Trump-Xi meetings is some sort of cease-fire over tariffs. At a minimum, bulls want to see the current tariff levels essentially frozen (and certainly no further tariffs imposed).

What markets also want to hear is progress on a plan between the countries to negotiate some kind of semi-comprehensive trade deal that takes this issue off the uncertainty table and relieves us all of the worry of a pernicious trade war. The problem here is that markets have somewhat priced in the above scenario, so if things don’t go as planned and no deal is done, or if things go south and we see additional tariffs discussed, then we are likely in for some big selling come Monday morning.

The flip side here is that if a better deal comes out than what the market expects, i.e. the rescinding of all or part of the existing tariffs and a commitment on no new tariffs, the upside on Monday could make that 600-point Dow day look like a puny upside move by comparison.  

TTP Update

The buying this week lifted many of the stocks in our Tactical Trends Portfolio (TTP), including NVIDIA Corp. (NVDA), which surged some 11.8% in just the past five trading sessions. This stock was unfairly punished, in my opinion, along with many other tech stocks during the recent sell-off. The same is true for Adobe Systems (ADBE), which jumped about 10.5% over the past five trading sessions.

The moves this week in these stellar stocks show the overcooked nature of the October selling. And if we get the second bullish catalyst out of the G-20 summit this weekend, expect these stocks to help power the TTP higher into the year’s end.