S&P 500; US Indexes Fundamental Weekly Forecast – Geopolitical Tensions Pose Short-Term Risks to Stocks

The major U.S. equity indexes closed higher last week for the second week in a row, helped by increased demand for higher-yielding assets as U.S. data mostly disappointed, leading investors to increase bets the Fed would pass on another rate hike later this year.

Investors weren’t only reacting to the possibility of lower interest rates. Some said the market was helped by upwardly revised GDP growth that reached 3% for the first time since 2015. Other said it was the possibility of tax reform and better-than-expected manufacturing data.

Investors were able to overcome a few negatives including geopolitical tension after North Korea launched a missile over Japan and the devastation caused by Hurricane Harvey.

Despite all of these events, stock market volatility has weakened again, moving toward the historic lows reached in late-July.

In the cash market, the benchmark S&P 500 Index settled at 2476.55, up 1.4% for the week. The blue chip Dow Jones Industrial Average finished at 21987.56, up 0.8% for the week and the tech-based NASDAQ Composite ended the week at 6435.30, up 2.7%.

Forecast

Monday is a U.S. holiday so the exchanges are closed. There is only one major economic report which likely means the price action is going to be steered at times by last week’s reports and outside events. I think it’s still a little too early to worry about the Fed meeting.

Investors may continue to show a reaction to last Wednesday’s GDP data and last Friday’s U.S. Non-Farm Payrolls report.

The second-quarter GDP revealed that the U.S. economy grew by an upwardly revised 3.0%. This is the strongest quarterly expansion since the first quarter of 2015 and was a notable acceleration from the 1.2% pace on the first quarter.

Last week’s unemployment report showed that the U.S. economy added 156,000 jobs in August. This number was below consensus expectations, however, the three-month average is still 185,000, reflecting a healthy labor market.

It looks as if investors are adjusting to slow, consistent growth and low inflation.

There are a couple of uncertainties that investors will face moving forward. Firstly, the impact from hurricane Harvey has been devastating and it shouldn’t be understated. We’re not certain about the long-term impact at this time, but we do feel there will likely be a short-term effect on GDP.

North Korea is the wildcard. Last week, it fired a ballistic missile over Japan. Over the week-end, it announced that it had successfully built and tested a hydrogen bomb. No one really knows how the U.S., South Korea or Japan will respond to the latest attacks. Also, the U.S. doesn’t seem to be getting any help from China or Russia in the negotiation process.

All we can really say is that geopolitical tensions and the uncertainties of potential nuclear conflict pose short-term risks to the stock market at this time.