S&P 500; US Indexes Fundamental Weekly Forecast – Investors Bracing for Retaliation to Tariffs

The major U.S. stock indexes closed lower last week, finishing February with a steep slide which helped generate the first monthly loss for the U.S. stock market since 2016. Once again, volatility was highlighted with four of five trading sessions posting daily moves of greater than 1 percent.

In the cash market, the benchmark S&P 500 Index settled at 2691.25, down 2.0%. For the year, the index is up 0.7%. The blue chip Dow Jones Industrial Average closed at 24538.06, down 3.0%. It is down 0.7% for the year. The tech-based NASDAQ Composite finished the week at 7258.14, down 1.1%. Despite the volatile trade, it is up 5.1% for the year.

Last week’s two-sided trade was fueled by hawkish commentary from Fed Chair Jerome Powell and a surprise tariff announcement by President Donald Trump.

In his first testimony before Congress, Powell said the central bank could raise interest rates three or more times during the course of this year to prevent the U.S. economy from overheating. This drove up U.S. Treasury yields and pressured stock prices.

Trump’s tariff announcement sparked fear of a trade war and more robust inflation. Fears of stronger inflation and foreign retaliation sent yields up across the board late in the week. The U.S. is expected to set tariffs of 25 percent when it comes to steel and 10 percent for aluminum, which could emerge as soon as this week and put pressure on companies both domestically and internationally.

Forecast

The tariff news is the major event that could derail the recovery from last month’s early 10-percent correction. Even if it only leads to a rangebound trade, higher-than-average volatility should be the norm. Uncertainty over when and how, for example, Canada, Europe and Asia, will respond to the tariffs is expected to be the primary driver of the price action.

Trade wars and tariffs are generally bearish for bonds and stocks because they raise inflation. Additionally, steel and aluminum are part of everyday life in the U.S. because they’re part of a lot of things consumers use from beer cans to autos.

We already saw the initial bearish response by investors to the tariff news. Now the waiting game begins. According to Cornell University Professor Eswar Prasad, the tariffs will invite “fairly strong retaliation from trading partners around the world, both targeted and unilateral actions.”

“One lesson that many of America’s trading partners have learned is that they need to use surgical strikes to make sure there is political pain exacted on the U.S. government,” he continued.

In other news, the highlight of the week will be the U.S. Non-Farm Payrolls report, due to be released on Friday. The headline number is expected to show the economy added 204K jobs in February. The Unemployment Rate is forecast to have dropped to 4.0% from 4.1%. The most watched part of the report will be Average Hourly Earnings since it is a measure of inflation. It is expected to show an increase of 0.3%.