'Phase one' trade deal with China, manufacturing slowdown: What to watch in November


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.

History repeats itself — until it doesn't.

Despite October's spooky reputation, and memories of last year's 6.9% slump, the S&P 500 rose 2% in the past month. What's more, this benchmark for the U.S. stock market just notched new all-time highs and is on track for annual returns of more than 21% — which would be its best year since 2013's gains of almost 30%.

A few factors are pushing the market higher, such as progress in the trade spat between the U.S. and China, a third interest-rate cut by the Federal Reserve, and corporate results for the third quarter that are better than analysts had feared.

In November, Wall Street is awaiting the first phase of a trade deal, along with more information about the Fed's next steps, and data that could show whether the slowdown in manufacturing is affecting the broader economy. Here's what you need to know:

The U.S. and China may strike a 'phase one' trade deal

What's happening: President Donald Trump and Chinese leader Xi Jinping were scheduled to meet at a summit in Chile on November 16-17 to discuss a possible "phase one" trade deal they had agreed on earlier in the month. Then news came on October 30 that Chile's president is calling off the gathering because of protests.

A White House spokesperson told CNBC the U.S. and China will still work to bring the partial deal to a conclusion within the same time frame. Trump said a new location for signing this deal will be announced soon.

Why it matters: Trade is "clearly at the top of the list" for Wall Street because it's been a source of turbulence in the past, says Hugh Johnson, chief investment officer and founder of Hugh Johnson Advisors. Progress on a deal is also important for Trump, with the 2020 presidential election one year away.

"There can be no question that, as part of his reelection process, President Donald Trump wants a phase one deal or something similar," Johnson says.

President Donald Trump wants a phase one deal or something similar.
Hugh Johnson
chief investment officer and founder, Hugh Johnson Advisors

Trump had said the trade agreement agreement would include a pledge for China to buy $40 billion to $50 billion in American agricultural products. That's significant because he "needs the farm vote," Johnson says.

What it means for you: The trade spat has been one of the biggest causes of uncertainty on Wall Street, especially because the International Monetary Fund recently said it will cut global growth to the slowest pace since the financial crisis of 2007-2009. The S&P 500 has spiked or dropped on signs of progress or setbacks, and that's likely to continue until a comprehensive agreement has been signed.

The slowdown in manufacturing may have worsened

What's happening: A closely tracked U.S. manufacturing survey showed that this industry shrunk in October for the third straight month, after falling to a 10-year low in September. When this gauge is below 50, as it is now, that signals contraction. While this particular survey won't be released again until December 2, in the interim traders will monitor other manufacturing data, including factory orders, durable goods, and another survey of manufacturing leaders.

Why it matters: In 2018, manufacturing made up just 11% of gross domestic product (GDP), but people like Johnson are asking, "Will the problems in the manufacturing sector, driven in part by trade, drag the services sector into a recession?" For now, the answer is no, but he'll be watching for signs of further slowing in the monthly surveys of purchasing managers for both the manufacturing and nonmanufacturing sectors.

What it means for you: Even if you don't work in manufacturing, you can gain from understanding what's going on in this industry because of how it ties in with overall growth. But it doesn't necessarily portend an economic slowdown; the manufacturing recession in 2015 didn't lead to a broader one.

How central bankers talk about next steps

What's happening: As expected, the Fed trimmed interest rates for the third time this year — but it also indicated it may pause on further cuts. Policymakers are scheduled to give speeches on November 1 and November 8, while the minutes from the October meeting are slated for release on November 20. Combined, traders will be looking for clues about the Fed's next steps.

Why it matters: Prior to the Fed's October meeting, traders had been betting — with 80.5% probability — that central bankers might cut interest rates for a fourth time when they convene in December. That's since fallen to 12.5%.

"We're at a point right now where there's a fairly significant difference between the Fed's expectation and the market's expectation for interest rates," says Eric Freedman, chief investment officer at U.S. Bank Private Wealth Management. "We're putting more stock in the Fed's guidance than we normally would."

We're putting more stock in the Fed's guidance than we normally would.
Eric Freedman
chief investment officer, U.S. Bank Private Wealth Management

What it means for you: The federal funds rate set by the Fed currently is in the range of 1.5%-1.75%, back where it was as recently as June 2018. The goal of lowering rates is to stimulate economic activity by making it cheaper for consumers and businesses to borrow money.

If you haven't already taken advantage of the rate cuts, consider making some smart money moves, like targeting debt repayment and securing a higher rate for your savings.

The bottom line

November historically is a middle-of-the-road month, with average annual returns of 0.7% since 1928, according to figures from Yardeni Research.

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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