S&P 500; US Indexes Fundamental Forecast – December 16, 2016

The major U.S. stock indexes rose on Thursday as investors appeared to have absorbed the impact of the Fed’s decision to raise rate 25 basis points on Wednesday and it forecast for possibly three rates hikes in 2017. The price action suggested that investors were ready to resume the post-election rally that has brought the Dow Jones Industrial Average close to the 20,000 level.

The ability to digest the Fed’s call for higher rates is a strong indication that this market has room to run before investors start to move money out of stocks and into the interest bearing Treasurys. Although some investors feel the rally may be overextended, there doesn’t seem to be any signs of a letup especially since they have limited areas to place their investment capital with negative interest rates in the funding currencies – Japanese Yen and Euro.

The investors calling for a short-term top are citing Thursday’s inability to make a new high for the week, following Wednesday’s surge to new all-time highs.

In the cash market, the blue chip Dow Jones Industrial Average closed the session at 19852.24, up 59.71 or +0.30%. The benchmark S&P 500 closed at 2262.03, up 8.75 or 0.39% and the tech-based NASDAQ Composite finished at 5455.94, up 19.27 or 0.35%. The popular March E-mini S&P 500 Index finished the session at 2258.50, up 6.50 or +0.29%

Forecast

With the Fed rate hike and forecasts seemingly behind us, the rally is likely to continue as long as optimism remains surrounding President-elect Donald Trump’s proposed policies, which include deregulation of certain sectors and tax cuts.

Helping to boost prices today could be another round of sector rotation especially in the financial sector. Investors are supporting financial stocks because they believe that the Trump administration is going to lift some of their regulatory restrictions. Furthermore, rising Treasury yields are good for their bottom line.

Utility stocks, however, are likely to suffer because of their sensitivity to rising interest rates. Furthermore, rising Treasury yields are getting more attention from investors.

Today’s housing reports are going to be watched closely as investors get to see how the housing sector has been performing in light of rising rates. Building Permits are expected to show 1.24 million units were added. Housing Starts are expected to come in at 1.23 million units.

Technical factors could also play a role in today’s markets. Overbought indicators may be keeping some investors on the sidelines. Furthermore, despite this week’s new all-time highs, the major indexes are flirting with last week’s close. Lower closes this week will signal that the selling is greater than the buying at current price levels.