S&P 500; US Indexes Fundamental Weekly Forecast – Fed Minutes, Walmart Earnings, Buffett Shareholder Letter on Tap

The major U.S. stock indexes rebounded last week, erasing a little more than 50% of the decline from the previous two weeks. All sectors participated in the rally. Volatility remains elevated which may have helped drive prices higher more quickly than expected.

In the cash market, the benchmark S&P 500 Index settled at 2732.22, up 4.3%. For the year, the index is up 2.2%. The blue chip Dow Jones Industrial Average closed at 25219.38, up 4.3%. It’s up 2.0% for the year. The tech-based NASDAQ Composite ended the week at 7242.15, up 5.3%. It’s up 4.9% in 2018.

After responding to volatile trading conditions during the week-ending February 9, and getting emotional at times about the speed of the market’s decline, investors seemed to reconnect with the underlying fundamentals last week.

Economic data continued to signal strength in the U.S. and global economy. Investors also reacted to improving corporate earnings which should continue to be the key guide for stocks over time.

With 80% of S&P 500 companies having reported fourth-quarter results, earnings in the most recent period have risen 15.2% versus a year earlier. Most importantly, revenue growth has averaged 7.9%, its fastest pace since the fourth quarter of 2011, suggesting economic strength is helping profits.

In other news, U.S. consumer prices rose considerably more than expected in January, fueling fears that inflation is about to turn dangerously higher.

The Consumer Price Index rose 0.5 percent last month against projections of a 0.3 percent increase, the Labor Department reported last Wednesday. Excluding volatile food and energy prices, the index was up 0.3 percent against estimates of 0.2 percent.

The report indicated that price pressures were “broad-based,” with rises in gasoline, shelter, clothing, medical care and food.

Forecast

Despite the strong rally last week, I’m not sure stocks are out of the woods yet. Many steep sell-offs in the past have been followed by fast retracements so the rally into the 50% to 61.8% zone of the recent sell-off came as no surprise.

Additionally, two weeks ago, investors were blaming the steep sell-off in stocks on the sharp rise in U.S. Treasury yields. Last week, yields touched 4-year highs and there was little reaction in the stock market to the news.

Perhaps investors have gotten used to rising Treasury yields and inflationary fears. We’re likely to find out this week if that conclusion is valid with the release of the Federal Open Market Committee’s monetary policy minutes on Wednesday.

At its January meeting, the Fed opted to leave interest rates unchanged but upgraded its inflation outlook, heightening the odds that the minutes will be perceived as hawkish. Data released since the meeting have already shown a sharp uptick in U.S. wages and a strong consumer inflation figure.

The key earnings data to watch this week will be from Walmart, Home Depot, Newmont Mining and Chesapeake.

Berkshire Hathaway will release its annual report, along with Chairman Warren Buffett’s letter to shareholders on Saturday, February 24.