Category Archives: chaos

The S&P 500 Rises as Index’ Dividend Outlook Improves

The dividend outlook for the S&P 500 (Index: SPX) in 2023 continued to improve. Combined with recent upward momentum, the index closed at 4,070.56, some 13.5% above its 12 October 2022 bottom, but still 15.1% below its 3 January 2022 record high peak.

Here's the latest update for the alternative futures chart, which indicates stocks running to the high side of the redzone forecast range. That level is consistent with investors focusing on the current quarter of 2023-Q1 in setting stock prices.

Alternative Futures - S&P 500 - 2023Q1 - Standard Model (m=+2.0 from 13 September 2022) - Snapshot on 27 Jan 2023

The dividend outlook in 2023 has continued to improve over the last two weeks. Here's the latest from the CME Group's S&P 500's quarterly dividend futures:

Past and Projected Quarterly Dividends Futures for the S&P 500, 2021-Q4 through 2023-Q4, Snapshot on  27 January 2023

Meanwhile, the upcoming Federal Reserve's Open Market Committee meeting this week helps account for why investors are so focused on the current quarter of 2023-Q1, where the market-moving headlines point to expectations of a quarter point rate hike. The Federal Funds Rate is also currently projected to top out on or by the conclusion of the Fed's March 2023 meeting. Here are the past week's headlines:

Monday, 23 January 2023
Tuesday, 24 January 2023
Wednesday, 25 January 2023
Thursday, 26 January 2023
Friday, 27 January 2023

The CME Group's FedWatch Tool still projects quarter point rate hikes at both the Fed's upcoming 1 February and 22 March (2023-Q1) meetings, with the latter representing the last for the Fed's series of rate hikes that started back in March 2022. The FedWatch tool then anticipates the Fed will hold the Federal Funds Rate at a target range of 4.75-5.00% through September 2023. After which, developing expectations for a U.S. recession in 2023 have the FedWatch tool projecting a quarter point rate cut in November (2023-Q4).

The Atlanta Fed's GDPNow tool's first projection for real GDP growth in the first quarter of 2023 is +0.7%, which would be a decline from the BEA's first estimate of 2.9% real GDP growth in the fourth quarter of 2022. GDPNow's final projection for real GDP growth in 2022-Q4 was 3.5%. We'll find out in a couple of months how close they got.

The S&P 500 in a Week When Not Much Happened to Change Anything

The S&P 500 (Index: SPX) ended the week down 26.48 points from the previous Friday, closing at 3,972.61.

In between the two Fridays, the index dipped and recovered, but otherwise experienced an uneventful week.

Alternative Futures - S&P 500 - 2023Q1 - Standard Model (m=+2.0 from 13 September 2022) - Snapshot on 20 Jan 2023

We find the level of the S&P 500 is consistent with investors holding their focus on 2023-Q1, which itself is consistent with the expecting timing of the peak of the Federal Reserve's ongoing series of rate hikes. Meanwhile, here are the week's not-so market moving headlines, which reinforce why investors are holding their focus on the current quarter of 2023-Q1:

Tuesday, 17 January 2023
Wednesday, 18 January 2023
Thursday, 19 January 2023
Friday, 20 January 2023

The CME Group's FedWatch Tool continues to project quarter point rate hikes at both the Fed's upcoming 1 February and 22 March (2023-Q1) meetings, with the latter representing the last for the Fed's series of rate hikes that started in March 2022. The FedWatch tool then anticipates the Fed will hold the Federal Funds Rate at a target range of 4.75-5.00% through September 2023. After which, developing expectations for a U.S. recession in 2023 have the FedWatch tool projecting quarter point rate cuts in both November and December (2023-Q4).

The Atlanta Fed's GDPNow tool's latest projection for real GDP growth in the fourth quarter of 2022 dropped +3.5% from last week's +4.1% estimate. Meanwhile, the so-called "Blue Chip" consensus forecast anticipates a +1.7% growth rate. The BEA will issue its first estimate of 2022-Q4's GDP later this month, on Thursday, 26 January 2023.

Brightening Outlook for 2023 Dividends Boosts S&P 500

We're seeing a remarkable change in investors' expectations for 2023's dividends for the S&P 500 (Index: SPX). The outlook for quarterly dividends has brightened considerably from the outlook we featured just a few weeks ago. Instead of falling year-over-year from the levels recorded in 2022, the CME Group's quarterly dividend index futures are now projecting they'll show positive gains with respect to last year's results for all but the fourth quarter at this writing.

The following chart shows the expectations for the S&P 500's quarterly dividends per share as of Friday, 13 January 2022.

Past and Projected Quarterly Dividends Futures for the S&P 500, 2019-Q4 through 2021-Q4, Snapshot on  13 January 2023

That change in expectations for dividends has boosted the outlook for stock prices through the first quarter of 2023. The dividend futures-based model is now projecting a more positive trajectory for stock prices, as indicated by the slightly upward slope of the redzone forecast range indicated on the latest update for the alternative futures chart.

Alternative Futures - S&P 500 - 2023Q1 - Standard Model (m=+2.0 from 13 September 2022) - Snapshot on 13 Jan 2023

Also during the past week, investors shifted more of their attention toward the current quarter of 2023-Q1. The S&P 500 ended the trading week at 3,999.09, rising to the high side of the redzone forecast range. That change is consistent with how we described stock prices would behave in that scenario in the previous edition of the S&P 500 chaos series.

How long might that last? That remains to be seen, but you can see some of the positive change in sentiment in the week's market-moving headlines, where expectations strengthened that the Fed's nearly year-old series of rate hikes will come to an end in this current quarter.

Monday, 9 January 2023
Tuesday, 10 January 2023
Wednesday, 11 January 2023
Thursday, 12 January 2023
Friday, 13 January 2023

The CME Group's FedWatch Tool continues to project quarter point rate hikes at both the Fed's upcoming 1 February and 22 March (2023-Q1) meetings, with the latter representing the last for the Fed's series of rate hikes that started in March 2022. The FedWatch tool then anticipates the Fed will maintain the Federal Funds Rate at a target range of 4.75-5.00% through November 2023. After which, developing expectations for a U.S. recession in 2023 have the FedWatch tool projecting a quarter point rate cut in December (2023-Q4). Or rather, no change at all from last week!...

We did see change for the Atlanta Fed's GDPNow tool's latest projection for real GDP growth in the fourth quarter of 2022, which increased to +4.1% from last week's +3.8% estimate. The BEA will issue its first estimate of 2022-Q4's GDP later this month, on 26 January 2023.

2022’s Volatility Continues Into 2023 for the S&P 500

The first week of trading in 2023 saw the S&P 500 (Index: SPX) rise 1.4% over where it ended 2022, closing the week at 3,895.08.

That rise was assisted by the first Lévy flight event of 2023, as investors shifted their forward-looking attention back to the current quarter of 2023-Q1 from 2023-Q2. The first look at the alternative futures chart for 2023-Q1 shows that recent development.

Alternative Futures - S&P 500 - 2023Q1 - Standard Model (m=+2.0 from 13 September 2022) - Snapshot on 6 Jan 2023

That shift continues the chaotic volatility that characterized 2022, which saw no fewer than 15 Lévy flights prompted as investors shifted their forward-looking focus from one point of time in the future to another. Like those events, the first Lévy flight event of 2023 was prompted by changing expectations for how the U.S. Federal Reserve will be setting interest rates in the months ahead. During the past week, investors' time horizon pulled back in toward the current quarter of 2023-Q1 as new information about the state of the U.S. economy brought with it the expectation this quarter will see the last of the Fed's ongoing series of rate hikes.

Here are the market moving headlines from the week that was that summarize the new information investors absorbed:

Tuesday, 3 January 2023
Wednesday, 4 January 2023
Thursday, 5 January 2023
Friday, 6 January 2023

The CME Group's FedWatch Tool continues to project quarter point rate hikes at both the Fed's upcoming 1 February and 22 March (2023-Q1) meetings, with the latter representing the last for the Fed's series of rate hikes that started in March 2022. The FedWatch tool then anticipates the Fed will maintain the Federal Funds Rate at a target range of 4.75-5.00% through November 2023. After which, developing expectations for a U.S. recession in 2023 have the FedWatch tool projecting a quarter point rate cut in December (2023-Q4).

The Atlanta Fed's GDPNow tool's latest projection for real GDP growth in the fourth quarter of 2022 rose a notch to +3.8% from last week's +3.7% estimate. The BEA will issue its first estimate of 2022-Q4's GDP later this month, on 26 January 2023.

Going back to the new alternative futures chart, we've added a redzone forecast range to represent where the trajectory of the S&P 500 is likely to go based on the assumption that investors will be progressively shift their forward-looking focus from 2023-Q1 to 2023-Q2 during the next 10 weeks. That assumption itself is almost certainly wrong, simply because in all likelihood, stock prices will be more volatile than the redzone forecast range suggests. We think it may still be useful however because it provides a frame of reference for telling which quarter investors are focusing upon as they reach to the random onset of new information. During the next six weeks or so, the level of the S&P 500 running above the centerline of the range will indicate investors are focusing mainly on 2023-Q1, while running below the centerline would indicate 2023-Q2 is where they've set their time horizon.

Looking beyond 2023-Q1, we're afraid that we'll be adding multiple redzone forecast ranges to the alternative future charts throughout 2023 to compensate for the effect of past stock price volatility on the projections of the dividend futures-based model. The model uses historic stock prices as the base reference points for its forecasts, where its raw projections are affected by the echoes of past volatility. Given 2022's high level of volatilily, that's to be expected and will be one of the major challenges we face in analyzing the behavior of stock prices this year.

The S&P 500 Ends 2022 Back in Bear Territory

After starting at its all time record high, the S&P 500 (Index: SPX) dropped into bear territory in 2022, spending much of the time during the year bouncing around the 20% decline threshold that defines bear territory. The last two weeks of the year were no different, with the index closing out 2022 right at the bear territory threshold.

The final update to the alternative futures chart for 2022-Q4 shows the index experienced one more Lévy flight event in 2022, with investors shifting their forward looking focus from 2023-Q1 outward to the more distant future quarter of 2023-Q2.

Alternative Futures - S&P 500 - 2022Q4 - Standard Model (m=+2.0 from 13 September 2022) - Snapshot on 23 Dec 2022

Given the closeness of the dividend futures-based model's projections for 2023-Q2, 2023-Q3, and 2023-Q4, it's possible investors have shifted their attention to more distant future quarters. But with the actual trajectory of the S&P 500 still within the range of values we would expect it to be for investors focusing on 2023-Q2, we cannot yet rule that possibility out.

Not that it would take long to get that picture sorted out. The market moving headlines of the last two weeks point to the expected timing of the peak of the Fed's series of rate hikes (2023-Q2) and the increasingly expected arrival of recession in the second half of 2023 as the factors that will set how far forward in time investors set their time horizons. Here are the headlines:

Monday, 19 December 2022
Tuesday, 20 December 2022
Wednesday, 21 December 2022
Thursday, 22 December 2022
Friday, 23 December 2022
Tuesday, 27 December 2022
Wednesday, 28 December 2022
Thursday, 29 December 2022
Friday, 30 December 2022

On the final trading day of 2022, the CME Group's FedWatch Tool was still projecting just a quarter point rate hike at both the Fed's upcoming 1 February and 22 March (2023-Q1) meetings. The FedWatch tool anticipates a third quarter point rate hike, in June (2023-Q2), with the Fed's series of rate hikes topping out at the 5.00-5.25% range. Looking further forward, developing expectations for a U.S. recession in 2023 have the FedWatch tool projecting two quarter point rate cuts in 2023, the first as early as July (2023-Q3) and the second in November (2023-Q4).

The Atlanta Fed's GDPNow tool's latest projection for real GDP growth in the fourth quarter of 2022 spiked higher to +3.7% from the +2.8% estimate of two weeks earlier. The "Blue Chip consensus" continues to project just over 1% real economic growth for the current quarter of 2022-Q4. The BEA will issue its first estimate of 2022-Q4's GDP later this month, on 26 January 2023, which will help determine which of set of nowcasts is more wrong.

We'll present our first look at the alternative futures for 2023-Q1 in the next edition of the S&P 500 chaos series.