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Trade Talks And Budget Talks To Dominate Headlines This Week

Stocks closed mostly higher yesterday with the Russell 2000 Small-Cap Index leading the way.

Optimism over the U.S.?China trade talks continues to underpin the market.

A U.S. trade delegation arrived in Beijing this week for a continuation of trade talks. Negotiations will be conducted by second-tier officials in the first part of the week, setting the stage for top-level talks on Thursday and Friday led by U.S. Treasury Secretary Steve Mnuchin, U.S. Trade Representative Robert Lighthizer, and Chinese Vice-Premier Liu He.

Both countries have insisted the talks are going well and have been very productive.

But there are still difficult issues to be worked out, and with a deadline of March 1st, there's no time to waste.

Traders will be listening for any piece of news to gauge how these talks are going. But as I've said before, there will be both positive and negative news stories regarding the trade talks as we approach the deadline. So try not to get caught up in the noise.

In other news, reports that budget talks have broken down in D.C. seemed to have little impact on the market. We'll see what happens come Friday. But with neither party benefiting from the last prolonged shutdown, I believe it's highly unlikely we'll see another one. If we don't get an agreement, the administration, rightly or wrongly so, will likely seek alternative measures for border security funding and building. There could be a small technical shutdown, like maybe a couple of days, between a deadline failure and an announcement, but no protracted shutdown like the last one.

In the unlikely event we do get a lengthy shutdown, it's important to remember that after the last one, the permanent negative impact on our economy was estimated at 'just' $3 billion and would shave 'only' 2/10ths of 1 percent off our full year GDP. And on a 3% economy, it should have virtually no impact.

This could explain why the market pretty much ignored the reports on the budget impasse.

It's not that the budget talks aren't important, because they are. But the impact is transitory.

The market, instead, is correctly more focused on the U.S.-China trade talks as that will have both a short-term and a long-term impact on not just the U.S. and China economies, but the rest of the world as well.

For now, the market still remains optimistic that an agreement will be reached.

And if we do, I expect stocks to break out to new highs this year!

See you tomorrow,

Kevin Matras

Executive Vice President, Zacks Investment Research

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