S&P 500; US Indexes Fundamental Weekly Forecast – Investors Expected to Remain Cautious Ahead of CPI Report

The major U.S. stock indexes were down sharply for a second consecutive week, bringing them down to levels not seen since early December. The lows reached in the futures markets extended into levels not seen since the Fall.

In the cash market, the blue chip S&P 500 Index settled at 2619.55, down 5.2%. For the year, the index is now 2.0% lower. The benchmark Dow Jones Industrial Average finished at 24,190.90, down 5.2%. It’s down 2.1% for the year. The tech-based NASDAQ Composite closed at 6869.97.00, down 5.1%. It is 0.4% lower for the year.

The E-mini futures contract showed similar closes. March E-mini S&P 500 Index settled at 2619.00, down 137.75 or 5.00%. March E-mini Dow Jones Industrial Average futures finished at 24167, down 1261 or -4.96% and the March E-mini NASDAQ-100 ended the week at 6417.75, down 338.00 or -5.00%.

There were no major changes in the fundamentals, but volatility did come roaring back last week. In 2017, volatility hovered around historically low levels. The largest decline last year was only 2.8%. Last week marked the return of volatility, highlighted by large daily price swings.

The Dow Jones Industrial Average led the way with intraday price swing exceeding 500 points in each of the past six trading sessions, including four sessions with swings greater than 1,000 points.

Forecast

Earnings season will continue next week with 59 companies from the S&P 500 Index expected to report. However, the primary driver of the price action is expected to remain investors’ reaction to rising interest rates. The underlying reason for higher rates are expectations for stronger economic growth, which has led to concerns about higher inflation and more Federal Reserve short-term interest rate hikes.

Over the near-term, investors have to be prepared for changing trading conditions. They also have to realize that market corrections are normal, but not always brief.

We can expect a sideways trade over the near-term if 10-year Treasury Note yields hold between 2.70% and 2.885%.

Stocks could rally if the benchmark 10-year falls below 2.70%. We could see another sharp break if rates exceed 2.885%. Crossing the 3.00% threshold could trigger an even steeper break.

The major U.S. reports this week that should influence the stock market price action are consumer inflation, retail sales, producer inflation and building permits.

On February 14, traders will get the opportunity to react to the monthly CPI report. Consumer inflation is expected to rise 0.3%. Core CPI is expected to come in 0.2% higher.

Retail Sales are expected to rise 0.5%. Core Retail Sales are called 0.2% higher.

Producer Inflation (PPI) is expected to rise 0.4%. Building Permits are forecast at 1.31M, slightly above the previous 1.30M.

Stronger-than-expected consumer inflation could be bearish for stocks if the news drives the benchmark 10-year Treasury Note through 2.885%. This will signal that inflation is rising and that the Fed may have to raise interest rates more aggressively this year.