S&P 500; US Indexes Fundamental Daily Forecast – Could Break Sharply if Fed Tone is Hawkish

U.S. equity indexes recovered enough on Tuesday after the previous session’s steep sell-off to close slightly better. The price action was likely fueled by position-squaring ahead of the start of the Federal Reserve’s two-day monetary policy meeting.

In the cash market, the benchmark S&P 500 Index settled at 2716.94, up 4.02 or +0.15%. The benchmark Dow Jones Industrial Average finished at 24727.27, up 116.36 or +0.47% and the tech-driven NASDAQ Composite closed at 7363.83, up 19.59 or +0.27%.

The Dow was lifted by shares of Boeing. The S&P 500’s gains were fueled by a rise in the energy sector which was underpinned by sharply higher crude oil prices.

On Monday, stocks were driven lower by a decline in Facebook shares. The social media’s stock suffered its biggest one-day drop since March 2014 after reports said political analytics firm Cambridge Analytica was able to collect data on 50 million member profiles without their consent.

Facebook’s decline dragged the entire tech sector lower, which pressured the broader market especially the NASDAQ Composite and the NASDAQ-100 Indexes.

Some traders said the move in the market should not lead to a change in the main trend. They claim the tech sell-off was micro and not macro driven, therefore, investors playing the short-term weakness could get caught on the wrong side of a broad-based rally.

Forecast

On Wednesday, the price action is likely to be driven by the U.S. Federal Reserve’s interest rate decision, monetary policy statement and economic projections.

According to the CME Group’s FedWatch tool, market expectations for a March rate hike are 94.4 percent as of Tuesday afternoon.

Given this certainty, investors are most likely to react to any hints offered by the Fed about whether the central bank will stay on track for three rate hikes in 2018 or if it expects to be more aggressive by forecasting four rate hikes. The Fed’s dot plot projections will reveal if the central bank believes an overheating economy needs to be cooled off by more aggressive monetary policy.

Stocks could break sharply if the Fed is hawkish in its tone. A dovish Fed could trigger a rally. However, keep in mind that investors are still concerned about a trade war, possible tariffs against China, elevated volatility and rising negative sentiment. These factors could limit gains or accelerate any sell-off.