The major U.S. equity indexes finished mixed last week with the Dow and S&P 500 hitting new all-time highs, and the NASDAQ failing follow in suit. The major highlight of the week was the volatility. A couple of days last week, the indexes popped over 1% on the back of increasing optimism that the U.S. Senate will pass the huge tax overhaul bill before the Christmas recess.
However, gains were threatened on Friday when news broke that Mike Flynn, President Trump’s former national security advisor, took a plea deal with the government and may testify regarding interference in the 2016 election.
In the cash market, the benchmark S&P 500 Index settled at 2,642.22, up 1.5%. The blue chip Dow Jones Industrial Average finished at 24,231.59, up 2.9% and the tech-based NASDAQ Composite closed at 6,846.62, down 0.6%.
Forecast
Investors should take a snapshot of last week’s price action because this may be the type of activity to expect over the near-term especially with the tax reform plan entering a key phase in the legislative process. The higher prices go, the bigger the dollar moves to expect, both up and down.
The price action wasn’t triggered by excessive speculation or irrational exuberance as some analysts are suggesting. Economic conditions, both domestically and globally, have been improving. Corporate profits have been strong.
Last week, for example, third-quarter GDP was revised up to 3.3%, the strongest period of growth for the U.S. economy in three years and the first back-to-back quarters above 3.0% since 2014.
However, with the market posting steep gains, investors have to be prepared for periodic steep retracements and seemingly overreactions to unexpected events.
The price levels may be changing rapidly but investors are reacting the same as they always have. They are buying good news and taking protection against risk when there are surprise events.
This week, the price action will be driven by tax reform news. The Senate and the House will be debating several key issues before the final version of the bill is presented to the President. This could generate two-sided trading at times. Furthermore, the Russian probe is still in the news. Any new revelations that bring key issues closer to Trump will be bearish. On Friday, investors will get the chance to react to the latest U.S. Non-Farm Payrolls data.
Additionally, some investors may start to take profits after this year’s stellar performance. This is because they expect returns to come in lower in 2018, and volatility to increase.
This article was originally posted on FX Empire