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S&P 500; US Indexes Fundamental Weekly Forecast – Tightening Monetary Policy Means Economy is Strong

James Hyerczyk

The major U.S. stock indexes posted a mixed performance last week. The Dow Jones Industrial Average and S&P 500 Index hit new all-time highs, but the NASDAQ Composite put in a sluggish performance.

In the cash market, the benchmark S&P 500 Index settled at 2502.22, up 0.1%. The blue chip Dow Jones Industrial Average finished at 22349.59, up 0.4% and the tech-based NASDAQ Composite ended the week at 6427.94, down 0.3%.

Weekly December E-mini S&P 500 Index

Last week, the U.S. Federal Reserve kept the target range for its federal funds rate at 1.00% – 1.25%, saying that the labor market still remains strong and inflation remains below its 2.0% target.

The Fed also said it would begin its balance-sheet normalization program in October. Additionally, the central bank kept open the possibility of a third rate hike in December.

Apple stock was a major drag on the Dow and the NASDAQ. Bank stocks were underpinned by the hawkish tone from the Fed. Healthcare stocks received a boost late in the week after it looked like the Republicans don’t have the vote to overturn Obamacare. Telecommunication stocks were supported by a spike in shares of T-Mobile and Sprint after CNBC reported that the two wireless carriers are reportedly in talks of a possible merger.

Weekly December E-mini Dow Jones Industrial Average

Forecast

The fact that the Fed has moved on to another phase of tighter monetary policy with the announcement of its plan to begin trimming its $4.5 trillion balance sheet in October is still a positive signal for stocks because it means that the central bank believes the economy is strong enough to handle it.

However, stock market expectations should be recalibrated because earnings are expected to taper-off during the tightening process. In other words, investors should see their gains in the market flatten out somewhat.

Weekly December E-mini NASDAQ-100 Index

Additionally, investors should watch for increased stock market volatility in response to periodic political and geopolitical events in Washington and the North Korean Peninsula respectively.

In the U.S. this week, the major reports include the Conference Board’s Consumer Confidence report, Durable Goods and Final GDP. Fed Chair Janet Yellen is also expected to give a speech on Tuesday at 1645 GMT.

With the Fed leaving open the possibility of a third rate hike in December, each U.S. economic report from now until the end of the year will take on greater importance so investors should watch for volatility with each release.

This article was originally posted on FX Empire

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