S&P 500; US Indexes Fundamental Forecast – December 27, 2016

The major U.S. equity indexes finished the week mostly flat last Friday ahead of the long Christmas holiday weekend. Volatility and volume were well-below average. The biggest concern for investors seemed to be the Dow’s inability to breech the historical 20,000 level before the holiday.

In the cash market, the bench mark S&P 500 Index closed at 2263.79, up 2.83 or +0.13%. The blue chip Dow Jones Industrial Average finished at 19933.81, up 14.93 or +0.07% and the technology-based NASDAQ Composite ended the session at 5461.01, up 13.59 or +0.25%. The popular March E-mini S&P 500 closed at 2260.00, up 1.25 or +0.06% in a generally lackluster trade.

The S&P 500 Index is up 11.03% for the year. Breaking down the index by sectors reveals the following Year-to-Date information. The Energy Sector is the biggest gainer, posting a performance of 26.47%. This is followed by the Financials Sectors at 22.27%. Telecommunication Services is up 18.45%, followed closely by the Industrials Sector at 18.12%.

Materials are up 16.07%. Utilities are up 13.48% and Information Technology is higher by 13.46%. The bottom-feeders are Consumer Discretionary at 5.67%, Consumer Staples, up 3.20% and Health Care at -2.99%.

Since Trump was elected on November 8, the financials, industrials and materials have shown the largest gains. This is because investors expect him to spend money on rebuilding the country’s infrastructure. Telecommunications and utilities are the weakest because of rapidly rising interest rates.

Forecast

Based on past history, we are expecting another low volume, low volatility week. However, this year is a little different because of the 20,000 target in the Dow. It’s a 50/50 proposition as to whether investors are going to come in strong enough this week to drive the Dow into this level. Traders still have to be careful about getting caught up in the quest for this seemingly magical number. It’s just psychological level.

As we go into the new year, investors have to be aware of the following. Firstly, it’s way too early to assess the impact of Trump’s election on the economy and the markets. Secondly, based on the price action the last two months, Trump’s victory boosts hopes for fiscal stimulus and deregulation. Thirdly, even if the stock market rally continues and the economy strengthens, investors may have to deal with Fed rate hikes that are designed to slow down the growth and inflation. We have yet to determine how investors will react to as many as three rate hikes in 2017.