S&P 500; US Indexes Fundamental Forecast – February 23, 2017

U.S. equities finished mixed on Wednesday following the release of the minutes of the Fed’s January 31 to February 1 monetary policy meeting. The minutes suggested that a rate hike may be coming fairly soon, but the price action in the markets suggests investor confusion.

In the cash market, the benchmark S&P 500 Index closed at 2362.82, down 2.56 or -0.11%. The blue chip Dow Jones Industrial Average finished the session at 20775.60, up 32.60 or +0.16% and the tech-based NASDAQ Composite ended the day at 5858.98, down 6.97 or -0.12%.

Forecast

Stock investors reacted to the Fed minutes as if they were expecting more dovish language. However, the odds of a March rate hike remained at 36%, nearly two-weeks before the next Fed meeting on March 15.

Currently investors are banking on the Fed to raise rates at least twice – in June and December. Last December, the Fed said it could raise rates at least three times, but I don’t think that investors accepted this figure, given the way things turned out in 2016. Therefore, a March rate hike would really be a surprise to stock traders.

The next two weeks could prove to be very important to stock investors. Next Tuesday, President Trump will deliver his budget to Congress in a prime-time address and the Fed meets on March 15.

In the minutes, the Fed said it discussed in detail the impact of Trump’s policies on the timing of the next Fed rate hike. If Trump goes off on a tangent and reveals more than his budget, for example, if he talks about a revamped health care plan or his new tax reform package then this may cause the Fed to act earlier than expected.

Remember the Fed minutes said that “a few” members believe raising rates at “an upcoming meeting” would allow the Fed greater flexibility to respond to higher-than-expected economic growth ahead.

This indicates to me that the Fed is concerned about the upside risks. These “upside risks” may come with “more expansionary fiscal policy or a more rapid buildup of inflationary pressures.”

Trump’s speech next Tuesday could help the Fed decide whether or not to raise rates on March 15.