S&P 500; US Indexes Fundamental Weekly Forecast – Tax Reform, Mueller Investigation in Focus this Week

The three major U.S. stock indexes finished strong last week after a mid-week sell-off as investors continued to digest the potential impact of tax reform, which could be approved by the Senate this week and signed into law by President Trump before the start of Christmas break.

In the cash market, the benchmark S&P 500 Index settled at 2,675.81, up 0.9%. The blue chip Dow Jones Industrial Average closed at 24,651.74, up 1.3% and the tech-based NASDAQ Composite ended the week at 6,929.65, up 1.4%.

In the futures market, the March E-mini S&P 500 Index settled at 2682.00, up 28.00 or +1.06%. The March E-mini Dow Jones Industrial Average closed at 24677, up 341 or +1.40% and the March E-mini NASDAQ-100 finished at 6498.50, up 140.00 or +2.20%.

Besides tax reform, investors focused on key economic data and the U.S. Federal Reserve’s interest rate and monetary policy decisions. Investors liked the Fed’s assessment of the economy and its gradual interest rate hikes. The central bank’s actions continued to make stocks, also known as higher-yielding assets, a most attractive investment.

Fed News

The Fed delivered a “dovish” outlook on inflation and the direction of interest rates. The U.S. central bank kept its interest rate projections steady rather than revising them higher.

The Fed raised its benchmark rate by a quarter point to a range of 1.25-1.50 percent on Wednesday. The central bank projected three more rate hikes in both 2018 and 2019, unchanged from its September forecasts.

The central bank also hiked its GDP estimate from 2.1 percent in September to 2.5 percent. The Federal Open Market Committee also adjusted its inflation forecast for 2018 to 1.7 percent from 1.6 percent.

Other U.S. Economic Data

In other news, U.S. producer price data showed an increase in wholesale inflation, increasing hopes that price pressures may be rising from sluggish levels. According to the Labor Department, the producer price index for final demand increased 0.4 percent last month. The number met economist expectations.

Core PPI was up 0.3%, beating the 0.2% forecast, but coming in lower than the previous month’s 0.4% read.

The Labor Department said on Wednesday its Consumer Price Index increased 0.4 percent last month after edging up 0.1 percent in October. That raised the year-on-year increase in the CPI back to 2.2 percent from 2.0 percent in October. The increase was in line with economists’ forecasts.

Core CPI advanced 0.2 percent in October. As a result, the annual increase in the core CPI slowed to 1.7 percent in November from 1.8 percent in October.

U.S. retail sales increased more than expected in November, helped by a brisk start to the holiday shopping season. Investors read this as a sign of sustained strength in the economy.

The Commerce Department said on Thursday that retail sales rose 0.8 percent last month. Data for October was revised to show sales gaining 0.5 percent instead of the previously reported 0.2 percent rise. Economists were looking for an increase of 0.3 percent in November.

Forecast

This week, investors will get the opportunity to react to U.S. data on Building Permits, Final GDP and Core Durable Goods Orders. However, the main focus will be on tax reform.

Last week, the Senate debate on tax reform caused some volatility when two Republican Senators announced they had issues with the language in the tax bill. However, once these issues were worked out, stocks rose sharply on Friday.

Stocks could continue to post strong gains as we move closer to the bill becoming law.

The markets could face some headwinds due to the investigation of Russia’s connection with the Trump campaign during the 2016 election.

Over the near-term, investors have faced several challenges including additional ballistic missile launches from North Korea and a pair of domestic terror events. Although they have not derailed the rally, they have served as a warning that there are still risks out there. Investors have to be prepared to adjust their positions accordingly, should there be a major event.