The stock market has rebounded from a dreadful December, and investors are keying in on President Donald Trump’s nationally televised address late Tuesday for indications of any fresh jolt to the economy and their wallets.
Trump is set to deliver the second State of the Union address of his presidency, and although such speeches don’t often set the market afire, investors may latch on to key elements of the speech to garner insights in the wake of a bitter, 35-day partial government shutdown alongside a protracted tariff battle with China.
“It wouldn’t be unheard of for the market to move based in part on a State of the Union, especially considering the possible ramifications on the economy if it looks like an immigration compromise might not be reached,” said J.J. Kinahan, chief market strategist at TD Ameritrade, in emailed comments.
Few other presidents have hitched their success to the performance of the stock market in the way the 45th president has during his tenure.
Trump cheered January’s gains for the market recently and has gone toe-to-toe with Federal Reserve Chairman Jerome Powell, whom he relentlessly criticized for increasing benchmark interest rates despite the market’s unfavorable reaction to higher borrowing rates. Trump’s disparagement of Powell came amid concerns that it would appear to challenge the central banker’s independence. (The Fed boss and Trump attempted to patch things up late Monday over dinner, according to the Wall Street Journal.)
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The record-breaking government shutdown was largely due to Trump’s insistence on securing from Congress some $5.7 billion in funding for a U.S.-Mexico border wall, which put Republicans reluctant to break ranks with the White House at loggerheads with Democrats led by House Speaker Nancy Pelosi and Senate Minority Leader Chuck Schumer.
Although the markets have responded positively to signs that a resolution on tariffs between Beijing and Washington is achievable, they may require a more concrete plan to take stock indexes much higher this year, some market participants have said. The Sino-American trade fight has run nearly a year, and Washington is threatening to increase tariffs to 25% from 10% on $200 billion worth of Chinese goods in early March if no agreement is reached.
“Despite nice forward-looking statements by a lot of CEOs this earnings season, many investors don’t trust the current rally with the tariff situation still hanging in the balance. Until there is some sort of trade deal, the nervousness will likely be sticking around for a while,” Kinahan wrote, referring to comments from corporate executives during fourth-quarter earnings season.
The Dow Jones Industrial Average DJIA, +0.68% has gained 8.9% so far in 2019, while the S&P 500 index SPX, +0.47% is on pace to return 9.1% over the same period, and the Nasdaq Composite Index COMP, +0.74% is poised for a gain of more than 11% to this point in the year, according to FactSet data.
John Lynch, chief investment strategist at LPL Financial, said progress on trade is vital because it wouldn’t only remove an element that has unsettled investors for its potential to rattle economies across the globe should it intensify, but a pact would help to underpin corporate investments.
“Progress on trade is key for renewed capital investment,” Lynch told MarketWatch in emailed comments.
“To the degree that businesses are able to take full advantage of immediate expensing provisions, that can boost productivity growth,” he said. “That helps sustain corporate income statements, profit margins and equity prices,” Lynch said.
According to MarketWatch’s Rob Schroeder, Trump could revisit the idea of producing a bill that would generate at least $1.5 trillion for building new roads, bridges and tunnels throughout the U.S. — a proposal that could nudge higher the funds and industries that would benefit from such proposals, even if gains are short-lived.
“The State of the Union will be a major event for U.S. equities as traders will see what President Trump will set for his agenda for the rest of the year. Trump may focus on an infrastructure deal, possibly a positive for Material stocks, as that could have the easiest bipartisan support in getting done,” wrote Edward Moya, market analyst at Oanda, in a Tuesday research note.
“Autos will also come closely under scrutiny as the President may start to preview his trade gripes with the European auto makers. Trump may also try to outline what steps will be taken on lowering drug prices, a possible blow for pharmaceutical stocks,” he wrote.
Some say that amid the political acrimony that intensified during the shutdown, Trump could adopt a less partisan tone in his speech, and that could, along with a continuation of his pro-business agenda, bode well for markets.
“Some have said the president may strike a conciliatory tone; however, I believe the intent is to cement the narrative that Trump’s pro-business strategies are working and that he is only candidate that can continue the progress,” wrote Jamie Cox, managing partner at Harris Financial Group.
“I expect lots of theatrics and funny facial expressions from his left shoulder,” Cox said, referring perhaps to the House speaker’s traditional perch behind the president and to Trump critics more generally, as the following tweet on Tuesdayfrom the president reflects:
A speech that further amplifies divisions, including a declaration of a national emergency to claim funds for the construction of a border wall, could be particularly bearish for the U.S. dollar, according to Elsa Lignos, RBC Capital Markets global head of currency strategy, in a Tuesday research note.
“That would weigh on [the U.S. dollar] as it raises prospects of a messy stand-off with Congress (the House would likely pass a resolution to challenge it, forcing Senators to also show their hand),” she wrote. One measure of the buck, the ICE U.S. Dollar Index DXY, +0.27% which gauges the currency against a half-dozen rivals, was up 0.2% at 96.06 on Tuesday but still down more than 0.1% so far this year, as the Fed has adopted a less aggressive posture in raising rates — seen as bullish for stocks but bearish for the buck because lower rates can undercut appetite for the greenback.
In any case, any reaction from the market is likely to be modest and short-lived, if history is a reliable guide.
Since 1961, the Dow has made gains of more than 1% on the day after State of the Union or equivalent addresses by presidents only five times. Last year, the Dow rose about 0.3% after Trump’s maiden State of the Union. (More about past stock-market performances after State of the Union addresses.)
Trump’s speech is scheduled to kick off at 9 p.m. Eastern time Tuesday, to be followed by an official Democratic response from party rising star Stacey Abrams.