S&P 500; US Indexes Fundamental Analysis – Forecast for the Week of February 27, 2017

U.S. equity markets continued to drive higher, increasing for a fifth straight week with the Dow Jones Industrial Average closing at a record high on Friday. Stripping out President Trump’s promise to deliver his tax reform plan in a timely manner, the primary driver of the market has been a better-than-expected earnings season.

For the week, the blue chip Dow Jones Industrial Average finished at 20821.76, up 1.0% and is now up 5.4% for the year. The benchmark S&P 500 Index closed at 2367.34, up 0.7%. It is up 5.7% for 2017. The NASDAQ Composite ended the week at 5841.78, up 0.1%. It has gained 8.6% for the year.

According to reports, the blended earnings growth rate for the S&P 500 is nearly 5%, and about 66% of companies have reported earnings above analyst estimates.

Better economic growth and earnings may be supporting rising stock prices, but there is uncertainty regarding upcoming policy changes, which could cause short-term volatility. Some portfolio managers are suggesting a rebalancing of portfolios may be in order which could drive the volatility. The market may have an easy time dealing with the rebalancing of stocks, but if managers decide to rebalance between stocks and bonds then we could see some potentially wild swings.

Last week’s Fed minutes affirmed the expectation for another rate hike soon, but the drop in U.S. Treasury yields and the subsequent break in the U.S. Dollar and rally in gold, suggest otherwise.

The minutes showed that Federal Open Market Committee members feel that if data on jobs and inflation continue on their path, “it might be appropriate to raise the federal funds rate again fairly soon.”

Traders, however, are having trouble interpreting the meaning of “fairly soon”. Although the price action this year suggests that investors have accepted the strong possibility of two perhaps even three rate hikes in 2017, traders seem to be getting caught up in the timing of the actual rate hike.

Some say investors shouldn’t be worried about the timing because the economy should be strong enough to handle 2 or 3 rate hikes.

Forecast

The real issue for investors at this time should not be how many times the Fed raises rates, but whether the economy can sustain its current growth pattern without the Trump administration’s plan for aggressive fiscal spending, tax reform and deregulation.

Trump was dealt a blow last week when Treasury Secretary Steven Mnuchin said he wanted to see “very significant” tax reform passed before Congress’ August recess.

Mnuchin’s comments suggest that Trump’s economic policy plan is now unclear and could prove to be a tough task as U.S. lawmakers will now be forced to work through a complex agenda.

If Trump is on a short-leash for failing to deliver on his pledges, I think investors are going to give him until Tuesday night’s speech to Congress. If he fails to instill confidence that he’ll be able to accomplish his plans, then investors will use this as an excuse to begin booking profits.

If Trump ignores key issues and instead remains focused on the Russians, fake news and the bad press then I believe investors will see this as a sign of weakness and begin tearing the market down to more reasonable price levels.