S&P 500; US Indexes Fundamental Weekly Forecast – Prepare for Lower Expected Rates of Return in 2018

The major U.S. stock indexes closed slightly lower last week on extremely low volume due to the long-holiday week-end. While U.S. gains may have been limited last week, 2017 was a banner year for U.S. equity markets. Trading was even better in the global marketplace with international stocks outperforming U.S. stocks for the first time in five years.

To recap the year, U.S. stocks posted strong gains, producing 20% returns, including dividends. Additionally, the Dow Jones Industrial Average rose more than 5,000 points, its largest ever point gain in a calendar year.

Last week, in the cash market, the benchmark S&P 500 Index settled at 2673.61, down 0.4%. For the year it gained 19.4%.

The blue chip Dow Jones Industrial Average settled at 24719.22, down 0.1%. Annually, the Dow produced 25.1% gains.

The tech-based NASDAQ Composite Index finished the year at 6908.05, down 0.8%. It gained 28.2% in 2017.

In the futures market, March E-mini S&P 500 Index futures settled at 2676.00, down 10.00 or -0.37%. March E-mini Dow Jones Industrial Average futures closed at 24735, down 31 or -0.13% and March E-mini NASDAQ-100 Index futures finished at 6408.75, down 75.00 or -1.16%.

Forecast

This week’s holiday shortened week is full of several key economic releases including the manufacturing purchasing managers index (PMI), the Federal Reserve’s December meeting minutes and the December U.S. Non-Farm Payrolls report.

Looking ahead to 2018, after above-average U.S. stock market returns for several years, investors have to prepare for the possibility of lower expected long-term rates of return this year.

The global market is expected to continue to strengthen, but U.S. economic growth may level off at about 2.5%, even with the corporate and individual tax cuts.

Earnings will be the key price driver in 2018. A tightening labor market may lead to faster wage growth. Along with rising energy prices, this could squeeze corporate earnings. Expanding sales and possibly lower tax rates could offset any weakness, however, earnings still could rise although slower than 2017.

Additionally, I think traders should look for the return of more consistent volatility. We could also continue to see both short- and long-term interest rates rise modestly in 2018.

Geopolitical tensions over growth in China, unrest in the Middle East and Venezuela and the lingering threat of a war with North Korea could continue to trigger volatile reactions in the stock market. Political issues in Washington could also be raised due to the possibility of President Trump’s involvement with Russia during the election.

Finally, although Trump and the Republicans passed the largest tax overhaul in 30 years, we still don’t know how aggressively they will pursue the abolishment of Obamacare or increased infrastructure spending due to mid-term elections.