S&P 500; US Indexes Fundamental Weekly Forecast – Tax Reform, Flattening Yield Curve Major Worries for Investors

The major U.S. stock indexes took a hit last week, snapping their weekly winning streaks. Weighing on the markets were concerns over a delay in the implementation of U.S. tax reform. Investors were primarily focused on the differences between the plans put forth by the U.S. House of Representatives and the U.S. Senate.

Investors are worried about the length of time it will take to reconcile the differences in the two plans, and a possible delay in the implementation of corporate tax cuts to 2019.

The blue-chip Dow Jones Industrial Average futures contract snapped an 8-week winning streak, settling at 23,422.21, down 0.50%. It’s up 18.5% for the year. The benchmark S&P 500 Index also broke an 8-week winning streak, ending the session at 2,582.30, down 0.20%. It’s up 15.3% for the year. The tech-based NASDAQ Composite ended a six-week winning streak, closing at 6,750.56, down 0.2%. It has posted a 25.4% gain for the year.

With a December Fed rate hike a done deal, investors are likely to keep their focus on tax reform. This is because it will affect the timing and frequency of future rate hikes in 2018 and 2019. The Fed needs to know when the corporate tax cuts will begin so they can make more accurate economic growth projections.

Forecast

The lack of clarity regarding tax reform is likely to continue to weigh on stock prices, particularly the S&P 500 Index and the Dow Jones Industrial Average. Both posted potentially bearish closing price reversal tops. If confirmed, this technical chart pattern could trigger a 2 to 3 week correction.

Over the near-term, the stock indexes are facing several obstacles that could have negative impacts on the rally. These include higher volatility, more moderate returns, gradually rising interest rates and aggressive sector or asset class rotation.

A major concern for investors should be the flattening yield curve. Last week, the gap between U.S. short-dated and long-dated Treasury yields shrank to its tightest levels in a decade as sluggish domestic inflation underpinned demand for longer-maturity government bonds.

High expectations the Federal Reserve would raise short-term interest rates at its December policy meeting and uncertainty over whether Republicans could pass their plan to change federal tax codes have also flattened the yield curve.

A volatile stock market and flatter bond yield-curve have made some investors fear an upcoming recession. Most investors are blaming the uncertainty surrounding the Republican tax bill, but many are being to worry if the rally has become too one-sided with tech stocks taking up too much of market share.

Some investors are also worried that the flattening yield curve is signaling an impending recession. It’s probably too early to determine that, however, if this week’s U.S. consumer inflation data misses the estimate then the odds of a recession may begin to increase.