S&P 500; US Indexes Fundamental Daily Forecast- Investors Could Be Rattled Over Trump’s Fed Chair Selection

The major stock indexes were up across the board on Tuesday, led by the Dow which set intraday and closing records. Leadership in the average continued to rotate with 3M leading the charge yesterday.

In the cash market, the bench mark S&P 500 Index settled at 2534.58, up 5.46 or +0.22%. The blue chip Dow Jones Industrial Average closed at 22641.67, up 84.07 or +0.37% and the tech-based NASDAQ Composite ended the session at 6531.59, up 14.87 or +0.23%.

The S&P 500 also finished at a record close, rising for the sixth straight session. The rally was led by airline stocks with Delta and United Continental advancing 6.6 percent and 6.1 percent, respectively.

The NASDAQ Composite also advanced while hitting a record high.

Investors continued to push stocks higher despite expectations of higher interest rates. This is because they are still historically low and recent Fed statements have lifted the veil of uncertainty going forward. Stock investors don’t seem to mind rising rates, but aren’t big fans of monetary policy uncertainty.

Forecast

I mentioned yesterday that the market is bullish but three factors could derail the rally, at least temporarily. They were renewed concerns over North Korea, issues with the Trump Administration’s tax reform plan and worries over the selection of Fed Chair Janet Yellen’s replacement.

Late Tuesday, traders started to whisper that there is speculation that U.S. President Donald Trump’s choice for the next Fed chair could be a less hawkish candidate than some had expected.

According to Politico, U.S. Treasury Secretary Steven Mnuchin favors Fed Governor Jerome Powell over former governor Kevin Marsh. Powell is seen as more dovish than Warsh, who has criticized the Fed’s bond-buying program in the past. A more hawkish Fed candidate would likely drive the U.S. Dollar higher.

This raises an issue for investors. Short-term, I think it can cause investors to lighten up on the long side because this issue introduces uncertainty into the market. And investors don’t like uncertainty. There initial response is to sell stocks while they sort out the details.

Long-term, a more dovish Fed Chair candidate will be bullish for stocks because in a low interest rate environment, stocks are the best investment.

In addition to the story about Yellen’s replacement, on Wednesday, investors will get the opportunity to react to the ADP Non-Farm Employment Change, ISM Non-Manufacturing PMI and a speech from Fed Chair Yellen.

I think bullish data is baked into the market and everyone knows Yellen is hawkish so investors are likely to react more to the developing story about Yellen’s replacement. If this is the case then we could see a weaker market today if investors decide to lighten up positions. Furthermore, investors may use Friday’s U.S. Non-Farm Payrolls report as another reason to book profits.