S&P 500; US Indexes Fundamental Weekly Forecast – Volatility Has Returned; Markets Look Fragile

The major U.S. stock index futures closed lower for a second week in a row as a pall of nervousness was cast over the markets in response to political drama in the Whitehouse and geopolitical events in Barcelona.

In the cash markets, the benchmark S&P 500 Index settled at 2425.55, down 0.60%. For the year, the index is up 8.3%. The blue chip Dow Jones Industrial Average settled the week at 21674.51, down 0.80%. It’s up 9.7% for the year. The tech-based NASDAQ Composite ended the week at 6217.97, down 0.60%. It’s up 15.5% for the year.

While we can’t predict the events in Washington, or geopolitical terrorist attacks or even the next move by North Korea, we are pretty confident that volatility has returned and it’s likely to remain here until at least the end of the year.

About two weeks ago, volatility as measured by the VIX was sitting at a record low level. Over the past two weeks, the S&P 500 has logged two of its three worst days this year. The benchmark index is now about 2% below its all-time high.

U.S. large-cap stocks are still near all-time highs and starting to look expensive now that volatility has returned. So investors who had adopted the “buy the dip” mentality during this somewhat “easy” bull market may have to reconsider their strategy.

What surprises me is how fast investors have been willing to dump stocks in reaction to the smallest of rumors and a few Presidential tweets, I can only envision the reaction to the downside when some really major event takes place.

Forecast

Investors should continue to focus on volatility and be prepared for two-sided swings. Investors are trying to get used to the idea that President Trump has a very slim chance of passing his tax reform bill this year and implementing his plan to increase infrastructure spending. They are also trying to get used to the idea of the Fed beginning the process of trimming its balance sheet and possibly raising interest rates later this year.

Most of all investors are going to have to get used to the idea that this rally may be coming to an end and beginning the correction process. Investors have been enjoying high returns because of the Fed. With the Fed about to begin the trimming process investors are going to have to get used to average to below average stock returns because earnings are going to be the only factor left to drive the indexes higher.