January 26, 2018 / 2:25 PM / a year ago

Wall St Weekahead-State of the Union more likely to raise eyebrows than stocks

    By Sinead Carew
    Jan 26 (Reuters) - Anybody hoping for a replay of the stock
market advance that followed U.S. President Donald Trump’s first
address to Congress may be disappointed. This time around,
shares could suffer if Trump does not tread carefully on
hot-button issues. 
    The S&P 500 jumped 1.4 percent the day after Trump's speech
last February, as an unexpectedly measured tone from the
notoriously abrasive president boosted investor optimism that he
would be able to deliver on pro-business campaign
    But with a new tax law under his belt, Trump is expected to
use his late-night State of the Union speech on Tuesday to
applaud that victory and broach topics including trade
agreements, immigration reform and infrastructure spending.
    That may not be enough to inspire investors further, after
enthusiasm about corporate tax cuts helped push the S&P 500 up
more than 19 percent in 2017 and 6 percent so far this year. 
    "Nothing is going to trump tax reform," said Michael
O’Rourke, chief market strategist at JonesTrading in Greenwich,
Connecticut. "Since I expect the president to do a victory lap,
the typical market reaction would be a sell-the-news reaction in
contrast to last year."
    The S&P 500 has had only 4 daily declines so far this year,
and the chances of a Jan. 31 selloff are higher if the market
does not take a breather before then, O'Rourke said. 
    Investors could be rattled by tough talk from Trump on
issues including U.S. immigration policy, which has already
divided lawmakers in a Republican-controlled Congress and led to
a three-day government shutdown. 
    "He's got to tread carefully on the hot-button items," said
Phil Blancato, chief executive of Ladenburg Thalmann Asset
Management in New York, citing immigration and trade talks. 
    He noted that a "pro-immigration agenda" could be the
easiest way to expand the U.S. workforce to boost an economy
with a tight labor market.  
    Congress agreed to extend funding to Feb. 8 and the White
House is expected to unveil an immigration legislation framework
a day before the speech.                           
    Strategists also are wary about how Trump will approach
international trade, including the North American Free Trade
Agreement (NAFTA) in his speech due to his tendency for "America
First" rhetoric. 
    "We know historically protectionism is bad for the economy.
It's bad for markets. You open a great deal of uncertainty if
you hone in on that," said JonesTrading's O'Rourke.
     U.S. officials on Thursday probed Canadian proposals for
unblocking talks on NAFTA but there were few signs of progress,
raising questions about whether any real movement is happening
at the penultimate round of negotiations on the treaty.
    Any trade comments would also come on the heels of Trump
approving a steep tariff on solar panels and washing machines,
moves those industries have warned could raise prices and
endanger jobs.              
    To be sure, Trump could boost sentiment with details on a
plan to rebuild U.S. infrastructure. On Wednesday he promised
$1.7 trillion in investments over the next 10 years. But any
related gains may be limited to sectors like industrials and
    And in general, big moves like the one seen last year are
relatively rare. 
    The market moved more than 1 percent in either direction
just 15 times the day after the annual U.S. presidential address
since 1965, when it was first televised at night. By comparison,
it had a 1 percent or more move 13 times in the session before
the speech.    
    Retail investors may be more likely than professional fund 
managers to let policy comments influence their trading, said
Blancato, who is not planning to make any asset allocation
changes based on the speech. 
    Investors may also be less sensitive to the speech's message
this time around. Many now say they largely ignore politics
after a tumultuous year with a divided Republican party, heated
exchanges with nuclear-armed North Korea, a probe of possible
collusion between Trump's election campaign and Russia and the
government shutdown.              
    Traders have instead focused on economic data and earnings,
which continue to look strong. Analysts expect the S&P 500's
fourth-quarter earnings per share to rise by 12.7 percent from a
year earlier, according to Thomson Reuters data.       
    "Short of something truly stupid like a trade war with China
or a withdrawal from NAFTA, or something horrific like a nuclear
conflict with North Korea, we don't see a scenario where
investors are likely to elevate politics to the same level of
importance as the global recovery and improving earnings," said
Robert Phipps, a director at Per Stirling Capital Management in
Austin, Texas. 

 (Additional reporting by Lewis Krauskopf; Editing by Alden
Bentley and Meredith Mazzilli)
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