S&P 500; US Indexes Fundamental Daily Forecast – Stocks Post Biggest Drop of New Year

The major U.S. stock indexes settled lower on Monday after the 10-year U.S. Treasury Note yield spiked higher, raising concerns higher interest rates would put a lid on the bull market. U.S. stocks also posted the biggest drop of the new year.

In the cash market, the benchmark S&P 500 Index settled at 2853.53, down 19.34 or -0.67%. The blue chip Dow Jones Industrial Average closed at 26439.48, down 177.23 or -0.67% and the tech-based NASDAQ Composite Index finished the session at 7470.53, down 35.24 or -0.47%.

Utilities, telecommunications and real estate were among the worst-performing sectors on Monday. These sectors were negatively affected by higher interest rates. Shares of Goldman Sachs and Bank of America, however, rose 1.6 percent and 0.25 percent, respectively. Investors expect them to benefit from rising interest rates.

In the U.S., the Core PCE Price Index came in as expected at 0.2%. Personal Spending rose 0.4%, but this was slightly below the 0.5% estimate. Personal Spending, however, came in better than expected at 0.4%.

In other news, the CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose 24.3 percent, or 2.7, to 13.77.

Forecast

On Tuesday, investors are likely to continue to monitor the yield on the 10-year Note. Another surge in rates could trigger an even steeper drop in stock prices. The benchmark 10-year yield broke above 2.7 percent to reach its highest level since April 2014. Fears of higher inflation are sparking the sharp rise in bond rates this year.

If yields continue to rise then interest rate sensitive sectors like utilities, telecommunications and real estate are likely to be pressured lower today.

In the U.S. on Tuesday, investors will get the opportunity to react to the S&P/CS Composite-20 HPI. It is expected to come in at 6.3%, slightly below the previous 6.4%.

The Conference Board’s Consumer Confidence report is expected to come in at 123.2, slightly above the previously reported 122.1.

Late Tuesday, President Trump will deliver his first State of the Union address. I expect him to talk up the economy and the U.S. Dollar, while discussing his immigration and infrastructure spending plans.

If yields continue to rise then stocks should drift sideways-to-lower on below average volume due to the Trump speech. If yields start to firm then stocks could move sideways-to-higher.

Stocks could be going through a transition period as we approach the end of the month. Furthermore, brokers may be taking profits on stocks they bought earlier in the month in order to get the commission.