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No Trade Deal, No Problem: ‘Wall of Worry’ Won’t Halt Stock Market Climb

Last Updated September 23, 2020 1:07 PM
Joseph Young
Last Updated September 23, 2020 1:07 PM

Rising geopolitical risks have begun to temper optimism on Wall Street, but researchers at LPL Financial believe that U.S. stocks will maintain strong momentum throughout the end of 2019.

The report comes as unwelcome escalations  in U.S.-China tensions have triggered a considerable pullback in the U.S. stock market.

LPL Financial says stock market will shrug off October slump

Writing in a newly published report , LPL Financial researchers noted that slowing global economic growth and uncertainties regarding monetary policy are unlikely to drag stocks into an extended correction, even if they create a “wall of worry” that catalyzes short-term volatility.

“Geopolitical matter have complicated the tug-of-war between fiscal and monetary policies and contributed to investor concerns about increased policy uncertainty. Policy uncertainty will likely persist, but we think financial markets will climb this wall of worry,” wrote John Lynch, the firm’s chief investment strategist.

Why researchers say stocks will thrive after the storm

s&P 500 chart, stock market
US stocks have suffered a dismal start to October, with the S&P 500 closing below 2,900 on Tuesday. | Source: Yahoo Finance

Many bearish investors have expressed concern about the Federal Reserve’s cautious stance on interest rates, fearing that a reluctance to aggressively cut rates could correlate with an economic recession.

With U.S. President Donald Trump applying more pressure on the Federal Reserve to bring down the interest rate to near zero, and concerning economic data  supporting his argument, Lynch said that accommodative central bank policy would prevent a severe stock market sell-off.

He wrote:

“We expect monetary policy to remain accommodative (easier to borrow money) worldwide as the global economy recovers from trade disruption, and we see this central bank intervention as a welcome support for risk assets. We’ll continue to emphasize diversified portfolio strategies, and we view stock-market selloffs as opportunities for suitable investors to consider rebalancing portfolios and adding to positions.”

While U.S. stocks have had a rough start to October – the Dow Jones Industrial Average is down around 750 points already this month – LPL’s researchers expect that investors will reenter the market sooner, rather than later.

No partial trade deal expected in 2019

The response of investors in the equities market towards the potential lack of a deal in 2019 remains a major variable for U.S. stocks, especially if corporate earnings continue to betray trade war-related weakness.

Lynch maintains this bullish stance even though he does not believe the Trump administration and Beijing will reach a new trade agreement – or even a partial deal – until the first quarter of 2020.

“Ultimately, we expect an interim deal sometime in the first quarter of 2020. The U.S. impeachment inquiry, though, will likely prevent any progress on the USMCA trade agreement (known as NAFTA 2.0), leading to prolonged uncertainty for trade with Mexico and Canada. There is also a chance the United States could implement auto tariffs on the European Union, adding to the uncertainty,” Lynch concluded.

That said, given that U.S. stocks have endured a relatively large pullback in the past three days due to worsening sentiment around the trade dispute, a deeper short term correction cannot be dismissed.