Summary:
· The S&P 500 moved higher last week, rising by 2.2%.
· Secretary Mnuchin made a statement that a decline in the dollar would be good for trade, which President Trump later said was taken out of context.
· Our projection this week is for stocks to decline to 2800 and then move higher as a new market cycle begins.
The stock market rose last week, with the S&P 500 (SPX) up 63 points to 2873, an all-time high.
The week began with the third day of the government shutdown, and equity futures opening modestly lower. Later Monday, once the shutdown was resolved, stocks again pushed higher. That evening, in a sign that a new leg of his trade policy was beginning, President Trump approved import tariffs on solar panels and washing machines.
On Tuesday, the Bank of Japan completed the second day of its monetary policy meeting, deciding that it would not change interest rates. Its short-term rate is currently -0.1% and its 10-year rate is 0%. In Alaska, residents scurried to evacuation centers in the darkness of night, after being warned about a potential tsunami, which later did not materialize.
On Wednesday, US Treasury Secretary Steve Mnuchin told reporters at the World Economic Forum, “Obviously a weaker dollar is good for us as it relates to trade and opportunities.” This sent the USD lower, as public officials do not normally make negative statements about their own currencies.
On Thursday, Trump walked back Mnuchin’s comments, saying that were taken out of context and that, “The dollar is going to get stronger and stronger, and ultimately I want to see a strong dollar.”
This approach echoed that of Chinese officials a few weeks ago, who noted their intention to reduce their portfolio of US debt, a statement which they later walked back. Taken together, this could be a reminder that we are still in an era in which currency wars have the potential to spiral.
While led to some volatility, on Friday, the Commerce Department reported Q4 gross domestic product of 2.6%. The to a move higher in equities, perhaps also helped along by President Trump’s restrained tone in reaching out to business and political leaders at the World Economic Forum.
The daily chart above shows our projection for the S&P 500 (SPX) in the coming week: a minor decline perhaps reaching the 2800 support zone, then rising again as a new market cycle begins. The green-dotted half circles represent the short-term market cycles.