S&P 500; US Indexes Fundamental Weekly Forecast – Volatility Returns on Trade War Escalation Fears

The major U.S. stock indexes finished mixed last week with the benchmark closing flat and the blue chip ending slightly lower. Investors seemed to handle the Fed rate hike and expectations of further rate hikes later in the year. However, late in the week, sentiment shifted with news of tariffs on Chinese imports.

The benchmark S&P 500 Index settled at 2,779.66, unchanged, while the blue chip Dow Jones Industrial Average finished at 25,090.48, down 0.9%. For the year, the S&P 500 Index is up 4.0% and the Dow has gained 1.5%.

To recap the week, the two main market driving events centered on the Fed’s monetary policy statement and the Trump Administration’s tariffs on China.

The Fed

On Wednesday, the Fed raised the target range for its federal funds rate for the second time this year, and the seventh time in the current expansion. The new range is 1.75%-2.00%.

Additionally, the central bank expressed a favorable view on the economy in its monetary policy statement and economic projections report, highlighting solid gains in employment, consumer spending, and business investment. All of which are expected to continue.

The Federal Open Market Committee (FOMC) also noted that core inflation has increased in recent months but remains close to its long-term target of 2.0%.

The FOMC also stated that it sees the U.S. economy evolving to the better that warrants further gradual increases to the Fed funds rate. This means the Fed expects two more short-term interest rate increases in 2018 and three more in 2019.

Impact of Tariffs

On Friday, the Trump administration said it will impose a 25 percent charge on up to $50 billion in Chinese goods, raising fears of a trade war looming between the U.S. and China. China promptly responded to the Trump administration’s announcement, with the Chinese Commerce Ministry saying it will implement tariffs on the same scale as the U.S.

Forecast

We expect to see heightened volatility this week due to fear and uncertainty driven by the trade tensions between the U.S. and China. However, based on the strong recovery on Friday after the initial sell-off, the return of volatility may not necessarily imply a prolonged sell-off.

The situation could turn favorable quickly if the tone of the White House eases and the negotiations continue. At this time, it may be risky to assume the worst or the best.

The biggest downside risk is that Trump follows through on his threat to impose more tariffs on Chinese goods if China retaliates with new duties of its own on American products.

Essentially it all boils down to the number of retaliatory moves both countries are willing to generate before there is a settlement.