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Following Nearly a Month of Shutdown, US Government is back to work. What's next to the stock market?

In the wake of a 35-day government shutdown, the US government is back up and running and market participants will have to absorb a deluge of events that can impact stock prices. This week is packed with earnings releases, trade negotiations, and a key monetary policy decision. Large-cap stocks like CAT, eBay, T, and AMZN are poised to release financial results. In addition, trade talks between the US and China will re-commence. Investors will have a peek at Q4 GDP, ahead of the FOMC meeting and of course, the Jobs report is scheduled for Friday. While gridlock in Washington DC has weighed on US growth in the first 4-weeks of the new year, trade talks between the US and many of its trading partners have slowed growth throughout the globe.

After 35-Days the US Government Shutdown Ends

On Friday, the US government reopened after a month of a partial shutdown. The Trump administration estimates that nearly 0.13% was cut from GDP for every week that the government was partially closed. This would shave approximately 0.65% off the Q1 result.

The shutdown also made it difficult for economists to forecast GDP. Market participants have been left without the release of pertinent US economic data, such as retail sales. Expectations are for Q4 GDP to rise by 2.65%, following a 3.4% increase in the Q3 of 2018.

The Next 3-weeks Will Have Twists and Turns

It’s anyone’s guess how the White House will play its cards over the next 3-weeks. The continuing resolution that was passed by the House and Senate runs its course on February 15, 2019. The government will need a new spending bill otherwise the government will close again. Trump lost this battle to House Speaker Pelosi and was criticized by right-wing conservatives, who did not want him to cave. In this situation, it appeared that he had no choice as the shutdown of NY’s LaGuardia airport was the straw that broke the camel’s back.

Stock prices experienced a minor relief rally when it became clear that the shutdown would conclude on Friday. Republicans are unlikely to favor another shutdown as the February 15 deadline approaches, which means that Trump is more likely to declare a “state of emergency” then go to the mat again with the Democrats. The markets have now priced in this trepidation, but if Trump again decides that a shutdown is his only course of action, stock prices will sell off.

Trade Talks Will Likely Fail to Generate a Breakthrough

Trade talks between the US and China will take a center stage early in the week. “Investors are hopeful for a resolution” according to Tradenet’s day trading academy founder Meir Barak. Barak’s students at Tradenet will see some choppy trading coming in to the week; but, he estimates, once the waters are clearer trading will be ever profitable. you can watch Barak’s analysis on his youtube trading channel.

Market participants should expect a positive spin, but it's unlikely that there will be a breakthrough. It's hard to believe that there will be any real progress ahead of the March 1, 2019 deadline, when tariffs are expected to be renewed and increased to 25%. So far, The White House has rejected Chinese offers to purchase more US goods and narrow the trade deficit as the key to a deal. The US appears to be seeking more drastic changes including the end of Chinese government subsidies for business and some form of a monitoring mechanism.

Earnings Will Help Drive Price Action

This week is a big week for earnings. Amazon and Caterpillar are market movers that can drive the Dow, S&P 500 and Nasdaq. Last week, semi-giant Lamb Research reported better than expected earnings. Tradenet’s Meir Barak says, “earnings releases, especially in turbulent times like those, are the best times for gap trades going either way. Any company that beats or misses expectations (the bigger the difference the better), is a potential trade for Tradenet’s students.” Q4 financial results have been mixed. While Lamb hit the cover off the ball, Intel missed on the top line. In addition to a miss on revenues, Intel guided lower for the Q1 of 2019.

Jobs Data Remains the Key to Market Sentiment

Jobs data continues to remain robust. Weekly jobless claims, continued to decline, to a 49-year low. Expectations are for an increase of 165K jobs in January following an increase of 312K in December. Generally, large increases in the number of jobs created are followed by a retracement back to the long-term mean, which is why expectations for the January report are for an increase of slightly more than half of December. The risk to stock prices is that inflation, in the form of hourly earnings, is running even hotter than the December. Market participants will be able to explain away a dip in job creation following the shutdown. But if wages are rising too quickly, rates will surge, capping any advance in share prices.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes.

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