S&P 500; US Indexes Fundamental Forecast – March 22, 2017

U.S. equities posted their worst loss of the year on Tuesday, pressured by the financial and healthcare sectors and general uncertainty over the direction of President Trump’s economic policies.

In the cash market, the benchmark S&P 500 Index closed at 2344.02, down 29.45 or -1.24%. The blue chip Dow Jones Industrial Average finished at 20668.01, down 237.85 or -1.14% and the tech-based NASDAQ Composite ended the day at 5792.86, down 108.67 or -1.88%.

Bank stocks led the way, losing value due to pressure from falling U.S. Treasury yields. Investors also zeroed in on healthcare stocks which are facing a mountain of uncertainty due to worries over the nation’s healthcare plan.

Falling 10-year Treasury yields have become a major problem for the stock market. They have been retreating since the release of the Fed’s monetary policy announcement on March 15. Although the Fed raised its benchmark interest rate 25-basis points, it signaled that it would “gradually” raise rates in 2017 instead of four rate hikes that were starting to be priced in by investors.

Bank stocks rose on speculation that higher rates would lead to higher profits. Once the Fed stood its ground and kept on the path it outlined in December 2016, investors realized that bank stocks were overpriced and began aggressively taking profits. This began to drag down the stock indexes heavily weighted in the financial sector.

A drop in retail stocks also contributed to the overall weakness in the markets. The catalyst behind this weakness was comments from Rep. Kevin Brady, the Republicans’ chief tax writer in the House. He told a television audience that a border adjustment tax will probably appear in the final tax reform plan.

Investors were also looking ahead to Thursday’s vote on repealing and replacing the Affordable Care Action. This vote is expected to cause volatility in the markets. On Tuesday, The Freedom Caucus, a key group of House Republicans, threatened to issue a formal statement of opposition to the Obamacare replacement bill, which would delay the vote, unless the language in the bill changes dramatically.

This could be a problem because if the government can’t get past health care reform, President Trump’s tax reform plan will likely be delayed and the market isn’t ready for this development. If Trump can’t begin to move on his plans then his first 100 days in office will be deemed a disaster. This will encourage investors to seek shelter in less risky assets and likely lead to a break in the stock market that gives back at least half of the “Trump Rally’s” gains.