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The major U.S. stock indexes finished mixed last week, demonstrating variable degrees of strength and weakness. The NASDAQ Composite posted a solid gain, the S&P 500 Index was modestly higher and the Dow Jones Industrial Average finished definitely lower.
While the indexes finished mixed, they all at some time were up for the week before posting several days of choppy, two-sided trading.
In the cash market, the benchmark S&P 500 Index settled at 2734.62, up 0.50%. The blue chip Dow Jones Industrial Average closed at 24635.21, down 0.50% and the tech-driven NASDAQ Composite finished at 7552.21, up 1.60%.
For the year, the S&P is up 2.3%, the Dow is down 0.3% and the NASDAQ is up 9.4%.
The choppy price action was primarily driven by political uncertainty in the Euro Zone, tariff announcements and May’s U.S. Non-Farm Payrolls report.
Stock market volatility was highlighted early in the week, but by the end of the week, solid jobs growth was strong enough to overcome political worries. This price action suggests investors have become accustomed to geopolitical events and heightened volatility and seem to be avoiding overreacting to wild daily price swings.
Forecast
There are very few major U.S. economic reports this week, and earnings season is over so investors are going to have to adjust their decision making to include a volatile bond market and geopolitical headlines.
Last week, bond prices were volatile, rising when stocks fell and falling as stocks rose. The Dow also moved an average of nearly 300 points each day, or about 1%. Bond market volatility could continue this week because traders aren’t sure if the Fed is going to raise rates two or three times in 2018.
Given the strength of Friday’s jobs report, it looks as if a June rate hike is a lock. This has probably been priced into the stock market. Rate hikes in September and/or December is what is causing the volatility.
Euro Zone political worries may have gone away, at least temporarily. Well, for Italy, but what about Spain?
Traders are also wondering if we’ll have a trade war. Last week, the U.S. announced tariffs on steel and aluminum against Canada, Mexico and the European Union. Some have retaliated, but is this a simple reaction, or the start of a trade war?
In my opinion, the economy is solid and that is good for stocks. However, any additional political worries or tariff announcements will likely cause investor sentiment to shift from optimism to pessimism. I also think investors will be able to handle stable or even steadily climbing interest rates, but they aren’t going to react well to a volatile bond market especially if rates spike higher.