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'The biggest risk out there' for the market — and why traders still feel positive about December

Twenty/20

Welcome to our monthly stock market outlook, where we preview what the pros will be monitoring and what everyday investors should know. Knowing what's happening in the market can make you a smarter investor and help inform your long-term strategy.

After another record-breaking month for the U.S. stock market, much of Wall Street looks ahead to December with confidence, though also with some concern.

Memories of last year may be fresh in many traders' minds: In just over three weeks in December 2018, the S&P 500 lost almost 15% and, at its worst, was down nearly 20% from an all-time high months before. For now, though, a repeat of 2018 doesn't appear likely.

The S&P 500, a benchmark for the U.S. market, is currently up more than 22%, putting it on pace for its best year since 2013's nearly 30% gains.

The big risk for the market is the ongoing U.S.-China trade spat. And there's a clock ticking as a December 15 deadline for new tariffs draws near. In addition to trade, Wall Street will be monitoring the all-important holiday shopping season.

Here's what you need to know.

The U.S. and China could strike a deal by mid-December

What's happening: President Donald Trump and Chinese leader Xi Jinping were scheduled to meet in November to discuss a possible "phase one" trade deal, but that gathering was called off. While a deal is said to be "imminent," the leaders have yet to convene and there's a tariff deadline on December 15, after which point additional U.S. levies on Chinese exports will go into effect.

Even so, the day-to-day headlines don't matter until there's some sign of progress or a breakdown in talks, according to Scott Ladner, chief investment officer at Horizon Investments. "The thing that we're really watching is Trump's Twitter account," he says, adding that while the President has been critical of China, he's been "very respectful" of China's leadership thus far. Any change might suggest a shift in the likelihood of a finalized trade deal.

Why it matters: So long as there's continued expectation that a deal will eventually happen, that's positive for stock prices, Ladner says. But if talks go "sideways," with results such as the leaders escalating tariffs on imports once again, that could cut into global economic growth and cause the market to go down, he adds.

Indeed, markets reacted after President Trump said this week that he could wait on a deal, possibly until after the 2020 presidential election next November. The Dow had dipped 350 points by midday Tuesday.

"That's the biggest risk out there right now," Ladner says.

What it means for you: Trade has been one of the biggest causes of uncertainty on Wall Street this year and remains a key issue for global economic growth. A major theme of 2020 has been that the U.S. stock market has spiked or dropped on signs of progress or setbacks, and that's likely to continue in the month ahead until a comprehensive agreement has been signed.

Consumers seem to feel confident this holiday season

What's happening: The gift-giving season is on and Wall Street types will be watching to see how cheery Americans are feeling this year. In addition to a sentiment survey scheduled for release on December 6, they'll also monitor real-time estimates of spending.

Holiday sales are expected to increase about 4% compared with 2018, according to the National Retail Federation. The typical shopper is expected to spend more than $1,000.

Why it matters: Consumer spending accounts for about two-thirds of gross domestic product (GDP), which is why people like Jeff Kravetz will be "watching closely" what's happening during the holiday season. "The consumer this year has been very healthy and resilient," says Kravetz, regional investment director for U.S. Bank Wealth Management.

In addition to monitoring what consumers are buying — electronics, luxury goods, or clothing, for example — Kravetz will also look for any clues from consumer spending that could impact the economy heading into 2020. U.S. growth is better than economists had expected just a few weeks ago.

What it means for you: No matter your holiday shopping plans, what your neighbors do matters to the overall economy. And the Federal Reserve cut interest rates three times this year in an effort to stimulate economic growth amid signs of slowing.

You can expect to see various reports throughout December on the pace of holiday sales. This season is monitored so closely because spending between November 1 to December 31 accounts for about 20% of annual retail sales each year, according to the National Retail Federation.

The bottom line

Last year around this time, the S&P 500 fell 9.2%, but historically December is one of the three best months of the year, with average gains of 1.3%, according to Yardeni Research. The period around Christmas generally is often positive for stocks, a phenomenon known as the Santa Claus rally.

Regardless of what happens in the coming weeks, remember that you don't need to make any changes to your long-term investing strategy based on short-term events. The market's performance this year is a good reminder to take a long-term view and stay the course.

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