S&P 500; US Indexes Fundamental Analysis – Forecast for the Week of March 6, 2017

The major U.S. stock indices rallied for a fourth straight week and closed at record highs on March 1, driven by better-than-expected economic data. Consumer Confidence reached a 15-year high, and the ISM Non-Manufacturing Index, which measures business activity and employment trends, rose to its highest level in 16 months.

In the cash market, the Dow Jones Industrial Average closed at 21005.71 up 0.9% for the week and 6.3% for the year. The benchmark S&P 500 Index finished the week at 2383.12, up 0.7% for the week and 6.4% for the year. The tech-based NASDAQ Composite Index ended the week at 5869.94, up 0.4% and 9.1% for the year.

In other news, U.S. Core Durable Goods Orders fell 0.2%, investors were looking for 0.5%. Preliminary 4Q GDP came in at 1.9%, below the 2.1% forecast, but equal to the previous read.

ISM Manufacturing PMI rose to 57.7, and Weekly Unemployment Claims hit a 44-year low at 223K.

The highlight of the week was the sharp rally in the equity markets on March 1. On this day, the Dow Jones Industrial Average closed above 21,000 for the first time in history after President Donald Trump’s first speech to Congress.

Trump’s speech was praised for its positive tone but he didn’t give many specifics about tax reform and deregulation, two key drivers of the market’s post-election rally.

Also of importance, the table was set for an upcoming rate hike early in the week by three prominent Fed officials, New York Fed President William Dudley, San Francisco Fed President John Williams and Fed Governor Lael Brainard. The decision was capped by Fed Chair Janet Yellen on Friday when she said, “We currently judge that it will be appropriate to gradually increase the federal funds rate if the economic data continue to come in about as we expect.”

Forecast

After rallying to new all-time highs on March 1, the major stock indexes drifted sideways to lower. The price action suggests that the indexes may be technically overbought especially since the rally was aided by the largest trading volume day of the year.

The price action may also be indicating that the market may be setting up for a short-term correction. At this time, we feel that upside momentum may be slowing. This may lead to a pullback that is designed to alleviate the upside pressure. However, it should not be strong enough to lead to a change in trend.

One concern being raised is about the speed at which investors changed their minds about a March rate hike. At the start of last week, investors pegged the chances of a rate hike at 30%. By the end of the week, the chances had increased to over 90%.

I think the market may be ready to accept 2 rate hikes this year, but 3 or possibly 4 will likely encourage some investors to pare positions in stocks for the safety of U.S. Treasurys.

Fed officials are in a blackout period so we won’t be hearing from any members this week. Therefore the direction of the USD/JPY will likely be determined by economic data.

The key report that will likely seal the deal for a rate hike is Friday’s U.S. Non-Farm Payrolls report. Early estimates show that investors are looking for the report to show the economy added 185K jobs in February. This will be lower than the previously reported 227K.

Average Hourly Earnings are expected to rise 0.3 percent, up from 0.1 percent. The Unemployment Rate is expected to drop slightly from 4.8% to 4.7%.