S&P 500; US Indexes Fundamental Daily Forecast – Reaction to Yellen Could Tell Us if Investors are Pricing in Tighter Monetary Policy

U.S. stocks went on a roller-coaster ride on Tuesday amid the latest Trump scandal before settling mixed for the day. The major indexes opened flat but sold off quickly, hitting session lows after Donald Trump, Jr. raised concerns the Russia controversy that’s hindered President Trump’s ability to pass key legislation will worsen.

By the end of the session, bargain hunters came in to drive the markets higher from their lows into the close. The price action suggests that while investors noted the new chapter in the Trump controversy, they were not likely to let the news derail the rally at this time.

In the cash market, the benchmark S&P 500 Index closed at 2425.53, down 1.90 or -0.08%. The blue chip Dow Jones Industrial Average settled at 21409.07, up 0.55 or 0.00% and the tech-based NASDAQ ended the session at 6194.70, up 18.31 or +0.30%.

Stocks fell hard after Trump’s eldest son released a chain of emails that led to a controversial meeting with a Russian lawyer who offered “high level and sensitive information” that would incriminate Hillary Clinton as part of the Russian government’s support for his father’s presidential campaign.

However, prices rebounded later after investors felt the selling was exaggerated due to the summer season’s below-average trade volume. Afterwards, they said it was just another headline in the continuing saga of the Trump campaign’s involvement with Russia’s attempt to influence the economy.

Forecast

We’re likely to continue to see a choppy, two-sided trade today on lighter-than-average volume even with Fed Chair Janet Yellen’s first day of testimony before Congress. I think the market has priced in at least one more rate hike this year, the muted inflation and the start of the dismantling of the Fed’s portfolio later this year.

Most traders are expecting the Fed to begin trimming its balance sheet in December so if she hints at a sooner-than-expected date, then this may pressure stocks.

Strong earnings have kept the rally alive this year in the wake of two Fed rate hikes and strong earnings should continue to be the market driver. With the start of earnings season on Friday, I think investors will quickly move on from Yellen without much fanfare.

Based on the reaction to Yellen’s testimony and fresh earning’s results, we should soon find out if investors have begun pricing in tighter monetary or if this market is still be driven by earnings.