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

U.S. stock indexes closed higher last week with its most noticeable gains coming after the Federal Reserve raised short-term interest rates by 25 basis points. The announcement of the quarter point rate hike brought the Federal Funds Rate target range to 0.75% to 1.00%. This was the central bank’s third rate hike during the current expansion and its second in the last three months.

For the week, the Dow Jones Industrial Average closed at 20914.62, up 0.1%. It is up 5.8% for the year. The benchmark S&P 500 Index closed at 5378.25, up 0.2%. It is up 6.2 percent for the year. The NASDAQ Composite finished the week at 5901.95, up 0.7%. It is up 9.6% in 2017.

The Fed also said that further rate increases would only be “gradual.” Fed officials also stuck with their outlook for two more rate hikes this year and three more in 2018.

Prior to the Fed’s decision, investors had been pricing at least four rate hikes this year. After the Fed announcement, U.S. Treasury investors had to adjust their portfolios due to the shift in sentiment. This sent Treasury yields lower, making the U.S. Dollar a less desirable investment.

Stocks rallied on the news because a “gradual” rate hike means rates will remain low for a longer period of time. This makes higher-yielding assets like stocks a more desirable investment.

Forecast

The complacency or lack of momentum in either direction could change soon because of the return of volatility. Investors may have had a hard time making a decision ahead of the Fed announcement because of the growing expectations for four rate hikes, or one more that investors had priced in at the start of the year.

Now that it looks like the Fed will stick with its original forecast, stocks could be underpinned. If aggressive buyers return then we could see another move to new all-time highs.

However, it may not all be smooth sailing for the bulls because of the uncertainties over the timing of initiatives from the Trump administration, and other political uncertainties abroad.

While we expect the Fed to stay patient and slowly raise interest rates as the domestic economy improves, no one is certain about the timing of Trump’s policy plans. This week, Congress will be taking on the new health care proposal. This vote is expected to be close but the debate could cause problems with health care stocks. The Fed’s decision to raise rates gradually may pressure financial stocks which had been pumped up in the days ahead of the Fed announcement.