S&P 500; US Indexes Fundamental Weekly Forecast – Volatility is Here to Stay

The three major U.S. stock indexes closed lower last week. The weakness was primarily attributed to heightened geopolitical tensions surrounding the United States and North Korea.

In the cash market, the benchmark S&P 500 Index settled at 2441.32, down 1.4%. For the year, the index is up 9.0%. The blue chip Dow Jones Industrial Average finished the week at 21858.32, down 1.1%. It’s up 10.6% in 2017. The tech-based NASDAQ Composite closed the week at 6255.92, down 1.5%. It is up 16.2% for the year.

While most of the focus recently has been on stellar corporate earnings announcements and improving economic conditions, last week’s price action served as a reminder that the uncertain geopolitical environment represents a near-term risk to investors.

Forecast

The situation between the United States and North Korea is expected to linger this week despite diplomatic attempts by China and Russia to diffuse a potentially lethal situation.

We could continue to see volatility and a two-sided trade this week as investors are likely to remain on edge. Long-term investors are going to have to decide whether to stay on course, or pare positions due to the risk.

If the news remains the same then we are likely to see small shifts in positions as investors trim risky positions while moving their proceeds into so-called safe-haven investments like the Japanese Yen, gold and U.S. Treasury instruments.

If the situation between the U.S. and North Korea worsens or if there is actual military activity then investors are likely to liquidate their positons more aggressively.

If investors put their faith behind the diplomatic efforts then we are likely to see a slowdown in the selling, but we may not see the same aggressive buying we saw leading up to last week’s sell-off.

I think last week’s sell-off served as a wake-up call to investors who became hooked on the “buy high, sell higher” mentality. In the past, we have seen that geopolitical risks can influence markets for short periods, but in the long-run the broader fundamentals will dictate the direction of the market.

Nonetheless, I think investors still have to approach the markets with caution this week because North Korea remains a wildcard. I also think that volatility is here to stay after lingering near historically low levels for several months.