This Week's Events

The stock market has to contend with a number of events this week -- /1/ signing of US/China Phase 1 agreement, /2/ Senate impeachment trial, /3/ start of corporate earnings releases, /4/ risk of an Iranian reaction to Trump's imposition of new sanctions, and /5/ some key US economic data.  None is likely to be a major hurdle for the market. 

The question with regard to the Phase 1 agreement is whether this will be a "buy the rumor, sell the fact" situation.  The market already responded positively to the announcement, so will there be profit taking when the agreement is signed?  Some analysts think the market reaction will depend on the details of the pact.  It is doubtful,  however, that the effects of the pact can be fully foreseen.  So, while there will be lots of opinion voiced, there is likely more uncertainty than might be heard.  Perhaps the most important implication of the pact is that a trade war has been averted and that there is precedence for more agreements in the future.  Any profit-taking in the market, therefore, will probably be short-lived.

The Senate impeachment trial should be a non-event, as long as acquittal is assured.  The issue of witnesses may have more negative potential for Democrats than for Republicans.  If Schiff, Biden and son are called, their testimonies may help Republicans more than Democrats, politically.  What they purportedly did smacks of dishonesty to say the least.  If Bolton is called, his testimony presumably will only corroborate what everyone knows -- that Trump was involved in holding back military aid to Ukraine.  The issue would remain whether this action warrants impeachment.  On balance, the result of the witnesses would likely be more favorable for Republicans than Democrats.  This should be a positive for the stock market.  But, since it risks hurting the moderate Biden and helping the left-wing Democratic candidates, the market impact is not clear.

Corporate earnings should be stronger in Q419 than in Q319, as I discussed in my December 29 blog.  But, consensus looks for about a 1.5% y/y decline, so individual company results should be mixed.  Nevertheless, with corporate earnings expected to speed up in 2020, the market impact of negative Q419 earnings should be transitory.

No one knows if or what Iran will do in response to Trump's imposition of further sanctions.  This uncertainty should weigh on the stock market, particularly if Iran issues dire threats.  But, as a businessman involved in the Middle East once told me, Arabic/Iranian rhetoric is typically more extreme than their actions.  Last week's missile attack seems to support this view.  The distinction between threats and action should be kept in mind in evaluating how this situation develops.

Consensus looks for a moderate 0.2% m/m December Core CPI and a strong 0.5% m/m increase in Ex Auto Retail Sales.  December Industrial Production should be flattish, similar to the -0.1% m/m consensus.  (Some of the December weakness in the manufacturing sector could be in anticipation of the stoppage of the Boeing 737 Max production in January.)  Prints near these estimates should have little impact on the stock market, as together they would point to the continuation of moderate economic growth.  The Atlanta Fed model's projection of 2.3% for Q419 Real GDP should be little changed after these releases.