S&P 500; US Indexes Fundamental Weekly Forecast – Fundamentals Bullish, but Vulnerable to Sector Rotation

The major U.S. stock indexes finished mixed last week. The price action was driven mostly by the U.S. Federal Reserve and a few key economic data reports.

In the cash market, the blue chip Dow Jones Industrial Average settled at 21,384, up 0.5%. It’s up 8.2% for the year. The benchmark S&P 500 Index ended the week at 2,433, up 0.1%. The index is now up 8.7% for 2017. The technology-based NASDAQ Composite closed at 6,152, down 0.9%. Despite recent setbacks, it’s still up 14.3% for the year.

The Fed raised its benchmark interest rate while also unveiling its plans to reduce the size of its $4.5 trillion balance sheet, and disappointing retail sales and inflation data caused interest rates to fluctuate more than average.

As widely expected, the Federal Reserve announced that it would raise its target rate range for federal funds by 25-basis points to 1.00% – 1.25%. The Fed took this action for the fourth time in the current economic expansion. It’s also the third rate increase in the last six months.

The central bank’s “dot plot” also revealed expectations for one more rate hike this year and three more in 2018.

In other news, investors continued to shed technology stocks in a sector rotation that began the week before. Also Amazon announced it was buying Whole Foods in a move that should shake up the grocery industry.

Forecast

Despite the Fed’s plans to continue tightening monetary policy, stocks remain bullish. A few days after the latest rate hike, the Dow even reached a new all-time high. The bullish scenario is being supported by optimism over the economy, rising corporate earnings and the relatively favorable interest rate environment.

With stocks pressing all-time highs, we expect to see more sector rotation plays as investors rebalance their portfolios to align with risks in the market.

There are no major U.S. reports this week, but several Fed members are on tap to deliver their opinions on the Fed rate hike and the strength of the economy. The market already knows how the Fed feels about future rate hikes so if any speakers deliver a dovish message, we could see some volatility in the stock market.

On Monday, investors will get the opportunity to react to comments from FOMC Member William Dudley and FOMC Member Charles Evans.

On Tuesday, FOMC Member Stanley Fischer is scheduled to speak in the morning. He is second in command at the Fed. Later in the session, Robert Kaplan delivers another speech.

Stocks will also be sensitive to any concrete develops regarding President Trump and the on-going investigation into whether he obstructed justice. So far, the markets seem to be immune to the headlines which may or may not be true.