S&P 500; US Indexes Fundamental Forecast – December 15, 2016

The major U.S. stock indexes were whip-sawed after the Fed announcement on Wednesday before closing lower for the session. The price action was triggered by the surprise announcement of possibly three interest rates hikes in 2017.

The Federal Open Market Committee raised its benchmark rate 25 basis points as expected, but also indicated a higher rate than projected back in September when it last released the quarterly forecast. The FOMC now expects three rate hikes in 2017, two or three in 2018 and three in 2019.

While most Fed members looked at the labor market and consumer inflation when making their forecasts, some factored in President-elect Donald Trump’s fiscal spending plans.

In the cash market, the benchmark S&P 500 Index closed at 2253.28, down 18.44 or -0.81%. The blue chip Dow Jones Industrial Average finished at 19792.53, down 118.68 or -0.60%. The tech-based NASDAQ Composite finished at 5434.92, down 28.91 or -0.53%.

The March E-mini S&P 500 Index futures contract closed at 2252.00, down 15.75 or -0.69%.

Forecast

The biggest losers on Wednesday were energy stocks and utilities. Energy stocks fell because of weaker crude oil prices, utilities because of the rising Treasury yields.

Rising Treasury yields could slow down the pace of the rally, but it is likely to pick up again as we approach Donald Trump’s inauguration. I don’t think that Treasury yields have reached a height to cause a massive asset reallocation, but we may see one later in the year if the Fed continues with its forecast for three rate hikes.

Furthermore, we still don’t know if Trump will have his way with fiscal spending, tax cuts and deregulation proposals. These are uncertainties that investors seem willing to overlook at this time.

While we feel that the strong uptrend is justified because of the amount of new cash coming into the market, I think a short-term break may be necessary to bring in even more cash. Eventually investors will grow tired of chasing this market higher and we will get the much needed correction. However, I’m not predicting one yet.

We’ll see how the market behaves today especially since the Dow is so close to 20,000. I think we’ll reach this level first before a sizeable correction takes place. I’d like to see it before the two-week holiday trade starts on Monday.