- Dow Jones Industrial Average futures are up significantly Thursday morning.
- The start of a phase two trade agreement between the U.S. and China this year could be a catalyst for the stock market.
- Sliding recessionary risks will be another tailwind.
Dow Jones Industrial Average (DJIA) futures are soaring early Thursday morning, pointing toward a strong opening for the stock market on the first trading day of 2020. The explosion in Dow futures this morning comes after a miserable end to 2019 thanks to mounting geopolitical tensions and weak economic data.
Despite the rosy outlook, calls for a steep correction are growing louder as investors grapple with overvaluation risks, geopolitical uncertainty and slowing overseas economies. https://t.co/Ebjmr5450s
— Nelly Naneva, LL.M., MBF (@NanevaNelly) December 31, 2019
The Dow had finished 2019 with a 100-point-plus plunge despite President Trump’s announcement that the phase one trade deal will be signed on Jan. 15. The stock market also ignored the fact that Trump will be visiting Beijing later this year to begin talks on a phase two trade deal with China. As the market had already priced in a trade one phase deal, the announcement couldn’t do much to protect the weakness on the economic front.
Dow futures erupt on the first trading day of 2020
Dow Jones futures were up a whopping 165 points, or 0.58 percent, as at 6.10 am ET. This signals a terrific opening for the stock market today.
S&P 500 futures are also up 0.56 percent, while Nasdaq Composite futures are showing stronger growth with a 0.70 percent increase.
Has the stock market found a new catalyst?
The expectations of a U.S.-China trade deal and rate cuts by the Federal Reserve were the key headlines for 2020. The Dow and the broader stock market celebrated as the Fed cut rates thrice, and Beijing and Washington came together to hammer out an agreement in the nick of time before fresh tariffs were to kick in.
It appears that the two sides are willing to work on the next part of a deal once the phase one pact is signed on Jan. 15 at the White House.
President Donald Trump added that "at a later date I will be going to Beijing where talks will begin on Phase Two!" https://t.co/pWLTHFLye4
— Delaware Online (@delawareonline) December 31, 2019
Though Trump hasn’t specified exactly when phase two talks will begin, the indication that he is willing to begin negotiations on one is a positive sign for the stock market. In the first phase of the trade deal, we have already seen that Chinese purchases of U.S. agricultural products have been on the rise.
According to Reuters, the new crops approved for import were soybeans and papaya, developed by the USDA and Hawaii University.
"This further expands channels for imports of U.S. agricultural products, and helps pave the way for buying more U.S. soybeans. https://t.co/wlcud2rOcl
— TheDOJ-is-Useless (@hebaisgood) December 31, 2019
The phase two of the trade deal could focus on broader issues and negotiations are expected to get underway as soon as the first agreement is signed in a couple of weeks. U.S. Treasury Secretary Steven Mnuchin had pointed this out to CNBC in an interview last year:
“We are going to go into a very short period of time of having the translation scrubbed, the deal will be signed in early January and then we will start on phase two,” Mnuchin told CNBC’s Hadley Gamble at the Doha Forum on Saturday.
“Phase two may be 2a, 2b, 2c, we’ll see, but this is unto itself a huge accomplishment for the president,” he added.
Trump has already clarified that he won’t wait until the 2020 elections to begin talks on phase two. The Dow and the stock market could continue rising in anticipation of this.
The Dow could also benefit from the sliding risk of a recession. It was earlier expected that the U.S. could be hit by a severe recession in 2020 and stocks could pull back. But recessionary risks are now receding. USA Today recently pointed out that economists believe that a 2020 recession — if it happens — would be “short and mild.”
The next recession won’t be as severe as the one we saw from 2007 to 2009. All of this indicates that the stock market could have another solid showing this year and the Dow could continue its journey north.