S&P 500; US Indexes Fundamental Weekly Forecast – Markets Supported by Low Rates, Expected Tax Reform Plan

The major U.S. stock indexes posted solid gains last week. The blue chip Dow Jones Industrial Average reached a new all-time high. The benchmark S&P 500 Index also reached a record high, trading at 2500 for the first time, while recording its largest weekly gain since January.

In the cash market, the Dow Jones Industrial Average settled the week at 22,268.34, up 2.2%. The Dow is up 12.7% for the year. The S&P 500 Index finished the week at 2,500.23, up 1.6%. It’s up 11.7% in 2017. The tech-based NASDAQ Composite ended the week at 6,447.68, up 1.4%. It’s posted a 19.8% return so far this year.

The catalysts behind the rally were expectations of lower interest rates over the near-term and the news that congressional Republicans plan to release the outline of a tax reform plan later this month.

Also driving the U.S. stock indexes higher was the news that the damage from Hurricane Irma was not as severe as expected. As the hurricane approached Florida during the week-ending September 8, speculators drove down the markets when they sold shares in insurance and travel-related companies. Investors bought these shares at relatively cheap prices last week, helping to boost the major indexes.

Forecast

Over the short-run, the stock market is going to continue to be influenced by geopolitical events such as the firing of missiles by North Korea and isolated terrorist attacks. Weather-related events like hurricanes and floods are also likely to trigger short-term reactions.

However, based on the upside momentum last week and the strong performances by the indexes, it looks as if investors are getting used to the potentially bearish external factors.

Despite the periodic negative vibes, investors seem to be more focused on the positives. For example, the possibility of tax cuts or tax reform could improve prospects for growth in 2018 and beyond, supporting elevated stock market valuations.

This week the Fed meets to discuss monetary policy. It is widely expected to keep interest rates unchanged. It is also expected to announce its plans to begin trimming its balance sheet. The central bank is also expected to give its outlook for the economy.

Although reducing its balance sheet is a form of tightening monetary policy, I think the process is going to be so gradual that it should have a minimal effect on stock prices. Therefore, investor demand for higher risk assets is expected to remain strong this week.