S&P 500; US Indexes Fundamental Analysis – Forecast for the Week of February 20, 2017

U.S. stock indexes closed at record highs on Friday as investors continued to react to possible changes to the U.S. corporate tax code and the regulatory environment. The catalyst behind these changes is President Trump. Since he took office, Trump has issued a few executive orders that deal with regulations, but not without controversy.

A little more than a week ago, he promised a “phenomenal” tax reform form plan. Although Trump also said it would be another two or three weeks before we’ll be able to see the new plan, the news was strong enough to ignite a huge rally.

In the cash market last week, the blue chip Dow Jones Industrial Average closed at 20624.05, up 1.7% for the week. The benchmark S&P 500 Index finished at 2351.16, up 1.5% and the NASDAQ Composite ended at 5833.46, up 1.8%.

For the year, the Dow is up 4.4%, the S&P 500 Index has gained 5.0% and the NASDAQ has been boosted by 8.5%.

The active sectors last week included energy and financials. Energy stocks were driven by the volatility in the crude oil market. The financial sector, led by banking stocks, was influenced by the swings in U.S. Treasury yields, which were driven in both directions by the prospect of a rate hike by the Fed in March.

Better-than-expected U.S. inflation data should have been supportive for higher interest rates, but traders were primarily focused on Fed Chair Janet Yellen.

U.S. producer prices rose more than expected in January, coming in at 0.6 percent. Consumer prices also rose more than expected, coming in at 0.6 percent last month after gaining 0.3 percent in December. Retail sales were also up last month by 0.4%.

Other strong data included the Philly Fed Manufacturing Index which jumped to 43.3, well-above the 18.5 estimate and 23.6 previous read. Weekly unemployment claims continued to hover around a 40-year low at 239K.

In her first day of testimony, in prepared remarks before the U.S. Senate Banking Committee, Yellen said the central bank will likely need to raise interest rates at one of its upcoming meetings in March or June. Yellen also expressed caution amid considerable uncertainty over economic policy under the Trump administration.

At mid-week, investors took a breather after a huge 13 day rally. The lack of clarity from Yellen on her second day of testimony may have been behind the more. Additionally, the uneasiness on the political front over Trump’s policies and the upcoming elections in Europe especially in France also drove investors into safe haven assets like U.S. Treasurys, gold and the Japanese Yen and out of risky assets like stocks.

Forecast

Political uncertainty in France and worries over Trump’s ability to run the government may pressure stocks this week, or at least limit the upside action The FOMC meeting minutes on Wednesday will be the major report to watch. Traders are hoping the minutes will tell them whether the Fed is on course to raise rates in March.

I think that investors have accepted that the Fed will raise rates this year. They just aren’t sure yet if it will be two or three hikes.

Trump can move the market sharply higher if he continues to talk about his tax reform plan, or reveals the timing of the release of his economic growth plan.