S&P 500; US Indexes Fundamental Weekly Forecast – Rising Rates Means Increased Stock Market Volatility

The three major U.S. stocks indexes finished the holiday-shortened week nearly flat. However, it took a robust U.S. Non-Farm Payrolls report on Friday to actually turn the markets higher for the week.

In the cash market, the benchmark S&P 500 Index settled at 2,425.18, up 0.1%. The index is up 8.3% for the year. The blue chip Dow Jones Industrial Average finished at 21,414.34, up 0.3%. In 2017, it is up 8.4%. The technology-based NASDAQ Composite closed the week at 6,152.78, up 0.2%. It’s up 14.3% for the year.

Earlier in the week, the indexes were pressured by geopolitical and monetary policy events. Geopolitically, investors were a little nervous over the developments in North Korea. Traders took protection as they waited for a response from the U.S. Rising global bond interest rates led some investors to move money out of stocks and into bonds.

Traders showed little reaction to the Fed minutes which reiterated the central bank’s plan to raise interest rates at least one more time in 2017. Investors also seem to be accepting of the Fed’s plan to begin trimming its massive balance sheet.

When the Fed stood alone, stock traders seemed to take their rate hikes in stride, but now that the European Central Bank, the Bank of Canada and the Bank of England all seem to be preparing to tighten monetary policy, investors seem to be getting a little jittery.

Forecast

Friday’s rally took place under thin market conditions due to the extended holiday for some of the major stock market players. Therefore, Monday could be a little interesting in the markets since these major investors have had the week-end to digest the U.S. Non-Farm Payrolls report.

The stronger-than-expected jobs report said one thing that the economy is on solid ground. However, the report also indicated that the labor market still has room for improvement due to the muted hourly wage growth.

Last week’s Fed minutes and monetary policy report also said that after holding rates at 0% for six years, the central bank feels the economy should be able to stand on its own two feet. It’s now up to investors to determine if the economy is strong enough to continue to grow on its own.

Rising interest rates should lead to higher volatility, which is something investors should start preparing for. With the Fed withdrawing its stimulus, it will also be withdrawing the safety net which goes along with monetary policy. This is the biggest adjustment investors will have to make going forward.

In addition to the shift in global monetary policy, stock investors should also leave some room for geopolitical turmoil especially in regards to North Korea.