Will the State Of The Union Address Impact Markets?

Will the State Of The Union Address Impact Markets?
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On Tuesday, February 5th, the President of the United States will address the nation before both houses of the Congress. The Speaker of the House delayed the annual speech until the end of the government shutdown.

Tuesday’s speech will be a first for President Trump as his past presentations were before a House of Representatives and Senate with majorities from his Republican party. The mid-term elections put the House in the hands of the opposition party, so he is likely to receive a different welcome on Tuesday evening.

The speech comes at a time of deep political divergence in the United States. While the shutdown ended, the border security issue that caused the partial closure of government have not gone away, and the next deadline looms large as it is just days away.

The State of the Union address is a chance for the sitting President to use his bully pulpit to boast about his administration’s achievements of the past year and roll out his agenda for the coming year. While the stock market had a rough fourth quarter, it seems to be back on track since the low on Christmas Eve. 

Source: CQG

As the weekly chart highlights, the E-Mini S&P 500 dropped from 2944.75 in early October to a low at 2316.75 at the end of December, a decline of over 21 percent. However, stocks bounced and were at the 2716 level on February 4 as the market has recovered more than half of the losses. The most recent economic data has been positive for the markets. Last Friday’s employment report showed significant job gains and wage growth. At the same time, at last week’s Fed meeting the central bank sounded a lot more dovish at the start of 2019 than they had throughout 2018 when they moved to hike interest rates by twenty-five basis points four times. The Fed told markets they would take a more patient approach to tightening credit which was welcome news for the stock markets.

Moreover, Chairman Powell did not rule out the potential of a shift in balance sheet reduction if market conditions warrant. Flexibility when it comes to reducing the Fed’s balance sheet caused stocks to rally in the aftermath of the meeting. In his speech, the President is likely to point to the recent gains in the stock market as a sign that tax and regulatory reforms are boosting the economy. However, there continue to be many issues on the horizon including the dispute with the Congress over a security wall along the southern US border, the ongoing trade dispute with China, and the investigation by a special prosecutor that can derail the stock market and cause a return of volatility over the coming days and weeks.

The State of the Union address on Tuesday and the response by the opposition party that will be delivered by Stacey Abrams who lost a close governor’s race in Georgia are likely to highlight the many differences between the political parties in the US. However, it is unlikely that the President’s speech or response will impact the stock market which remains in recovery mode during the second month of 2019.

 

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