Category Archives: chaos

S&P 500 Investors Keep Focus Fixed on 2022-Q2 Awaiting the Fed’s Next Signals

The third week of May 2022 came and went with Federal Reserve officials signaling their willingness to hike interest rates higher than they've previously suggested. S&P 500 (Index: SPX) investors locked their forward-looking focus on the current quarter of 2022-Q2 in response, held there by the uncertainty of what will come from the decisions the Fed will make before its end.

That's what we read in the latest update to the alternative futures chart, which reveals the index is tracking remarkably closely to the alternative trajectory associated with investors focusing their attention on the current quarter according to the dividend futures-based model.

Alternative Futures - S&P 500 - 2022Q2 - Standard Model (m=-2.5 from 16 June 2021) - Snapshot on 20 May 2022

It's unusual for the actual trajectory of stock prices to track so closely along with a particular projection for investors focusing on a given quarter. We normally see more noise in day-to-day trading than we've had during the past week. That said, the clock is ticking down for how long investors can continue to fix their focus on 2022-Q2, which points to a potential investing opportunity that will exist until their forward-looking attention does shift to another point of time in the future in what will be the stock market's next Lévy flight event.

This assumes we don't see significant erosion in the expectations for dividends expected in the upcoming quarters to which investors might next shift their attention. Fortunately, that prospect is so far a low risk consideration for the near term.

Here are the market-moving news headlines that helped shape investor expectations in the week that was.

Monday, 16 May 2022
Tuesday, 17 May 2022
Wednesday, 18 May 2022
Thursday, 19 May 2022
Friday, 20 May 2022

The CME Group's FedWatch Tool continues to project the Fed will hike rates by a half-point in June (2022-Q2), followed by a two more half-point hikes in July and September (2022-Q3). After which, the tool projects the Fed will slow down, hiking rates by just a quarter point each in November and December 2022 (2022-Q4) to close out the year.

The Atlanta Fed's GDPNow tool projects real GDP growth of 2.4% in 2022-Q2, up from last week's projection of 1.8%.

What Should the Value of the S&P 500 Be?

Since the S&P 500 (Index: SPX) peaked at 4,796.56 on 3 January 2022, the index has dropped by 18.2% of that record high value. But that simple observation raises a question. What should the value of the S&P 500 be?

We have a couple of interesting ways to approach answering that question, the first of which relies upon how investors set the average level of the index with respect to its trailing year dividends per share during periods of relative order in the U.S. stock market. The following chart illustrates the five major periods of order the S&P 500 has experienced since December 1991, which have been periodically interrupted by periods of relative chaos.

S&P 500 Average Monthly Index Value vs Trailing Year Dividends per Share, December 1991-May 2022 (through 18 May 2022)

In the chart, we show the mathematical relationships that have applied during those relative periods of order, which connects the average monthly value of stock prices (y) with the level of the index' trailing year dividends per share (x). We've built the following tool to do the related math to see how investors would set the value of the S&P 500 for the period of order you select for the trailing year dividends per share you enter. If you're accessing this article on a site that republishes our RSS news feed, you may need to click through to our site to access a working version of the tool.

Alternate S&P 500 Valuation Criteria
Input Data Values
Relative Period of Order
Trailing Year Dividends per Share

Projected S&P 500 Index Value
Estimated Results Values
Index Value Corresponding to Selected Period of Order

Using the default selection of the most recent period of order, which lasted from December 2018 through February 2020, until the arrival of the coronavirus pandemic initiated a period of chaos for the U.S. stock market, we find that with May 2022's estimated $62.90 for trailing year dividends per share, the corresponding value of the S&P 500 would be $3,777.

Or rather, that's what the math suggests would be a reasonable level for the S&P 500 had that relative period of order continued to the present. Since that value is below the current level of the index, this result suggests stock prices still have room to fall, but it's important to note that this level is neither a ceiling nor a floor. It simply represents the mean to which stock prices would revert during this particular previous relative period of order.

That mean level is visualized as the extended trajectory for this relative period of order in the chart above, where you can see the chaotic impact the arrival of the coronavirus pandemic had in March 2020, followed by the bubble inflated by the COVID stimulus programs of 2020 and President Biden's inflation-generating American Rescue Plan Act stimulus program of March 2021. That bubble entered its deflation phase after December 2021, which is still underway today.

With more than one previous relative period of order to choose from, there's a lot of room for interpretation. Other selectable options, such as the one for the early 1990s, may suggest the S&P 500 is greatly undervalued for the dividends per share you enter. One of the cool things about this tool is you can do the math for any level of trailing year dividends per share you choose, so you can find out how stock prices could alternatively been set during the days of the Dot Com Bubble, if that's your area of interest, or during any of the other periods in between. Go ahead and take the tool for a test drive to explore the world of alternate S&P 500 valuations!

Can you project where the S&P 500 could go during periods of chaos?

We know what you're thinking. Wouldn't it be nice if you could project what a reasonable level for the S&P 500 would look like during periods of chaos for the stock market? It would indeed, and we have you covered there as well.

Alternative Futures - S&P 500 - 2022Q2 with m=-2.5 from 20210616 - Snapshot on 20220518

If you know what the expectations are for changes in the growth rate of dividends at different points of time in the future, and you know how far into the future investors are focusing their forward-looking attention as they set current day stock prices, you can reasonably project the level for the S&P 500 even during periods of chaos in the stock market. It has been possible since April 2009 and became practical to accomplish after November 2009, when the CBOE introduced modern quarterly dividend futures for the S&P 500.

S&P 500 Investors Set Their Full Focus on 2022-Q2

After starting the week with a bang, the S&P 500 (Index: SPX) saw its level of volatility die down as investors solidified their forward-looking attention on 2022-Q2.

How long it might stay there is a question that remains to be answered, but the latest update of the alternative futures chart shows the level of stock prices is fully consistent with that assessment.

Alternative Futures - S&P 500 - 2022Q2 - Standard Model (m=-2.5 from 16 June 2021) - Snapshot on 13 May 2022

Better still, we've moved out of the period where the echoes of the past volatility of stock prices affected the accuracy of the dividend futures-based model's projections, which had required us to add redzone forecast ranges to the chart to compensate in helping track the S&P 500's latest Lévy flight events.

Since we've already outlined what may come next for the S&P 500 in an update to the previous entry of our ongoing S&P 500 chaos series, let's recap the market-moving news headlines from the week that was:

Monday, 9 May 2022
Tuesday, 10 May 2022
Wednesday, 11 May 2022
Thursday, 12 May 2022
Friday, 13 May 2022

According to the CME Group's FedWatch Tool, the Fed will hike rates by a half-point in June (2022-Q2), followed by a two more half-point hikes in July and September (2022-Q3). The Atlanta Fed's GDPNow tool projects real GDP growth of 1.8% in 2022-Q2, down from last week's projection of 2.3%.

A Week of Well-Telegraphed Volatility for the S&P 500

We had a lot of fun watching the S&P 500 (Index: SPX) during the first week of May 2022. In case you missed it, the index swung through relatively rare 3%+ changes in its daily value.

And all of it was well telegraphed! Or rather, it was consistent with how the dividend futures-based model says the index would act given the new information investors have had to absorb in recent weeks. Here's a quick recap of our relevant coverage:

That last post contains updates addressing the specific causes of last week's wild market action, which added two more Lévy flight events to 2022's tally! Here's how they look on the latest update to the alternative futures spaghetti forecast chart:

Alternative Futures - S&P 500 - 2022Q2 - Standard Model (m=-2.5 from 16 June 2021) - Snapshot on 6 May 2022

Through Friday, 6 May 2022, we find investors are mainly focusing on the current quarter of 2022-Q2 in setting current day stock prices. Investors are betting the Fed will be compelled to hike interest rates by a bigger amount before the end of the quarter than they've been willing to publicly commit, completely reversing the expectation the Fed set on Wednesday, 4 May 2022 that 2022-Q2 would not see such a larger hike.

If you've been following the S&P 500 chaos series, you already know the importance of following the random onset of new, market-moving information. Although we've discussed the specific triggers for last week's market volatility via updates to last Monday's regular entry to the series, here's a more comprehensive picture of what was new and noteworthy during the week that was.

Monday, 2 May 2022
Tuesday, 3 May 2022
Wednesday, 4 May 2022
Thursday, 5 May 2022
Friday, 6 May 2022

The CME Group's FedWatch Tool projects the Fed will hike rates by three-quarters of a point in June (2022-Q2) and by another half point in July (2022-Q3), followed by a quarter point hike in September (2022-Q3). The prospects for a larger-than-half-point rate hike in June is why investors are now mainly focusing their attention on 2022-Q2 in setting current day stock prices.

The Atlanta Fed's GDPNow tool's is forecasting 2022-Q2 will rebound with a positive 2.3% real growth rate following 2022-Q1's negative growth.

Update 9 May 2022

Another exciting day for the S&P 500, which dropped more than three percent again! But as you'll see, that drop moved the level of the index right toward the middle of the redzone forecast range associated with investors focusing on the current quarter of 2022-Q2:

Alternative Futures - S&P 500 - 2022Q2 - Standard Model (m=-2.5 from 16 June 2021) - Snapshot on 9 May 2022

Big movement, but not a new Lévy flight because it is really a continuation of 2022's fifth event.

At this level, provided investors maintain their forward-looking focus on 2022-Q2, much of the wild swings should become relatively tempered. As you can see from the projected alternative future trajectory corresponding to this time horizon, there could still be significant declines ahead of up to 200-300 points, but that would come without the big upward movements associated with a new Lévy flight event.

Now, here's the catch. There's only a finite amount of time investors can maintain their focus on 2022-Q2. As the current quarter, the clock is already ticking down on it, which means investors will be forced to shift their attention to a different point of time in the future at some point on or before the third Friday of June 2022. That potentially forced shift of focus will trigger a new Lévy flight event. It's just a question of when, with its magnitude determined according to which other quarter investors might shift their attention and what the associated expectations for dividend growth are for that future quarter at the time when it happens.

Looking forward, the big market-moving news event for this week will likely come on Wednesday, 11 May 2022 when the next official report on inflation comes out. That will be early in the day, so we shouldn't have long to wait to find out what kind of impact it will have, especially if the actual figure reported for April 2022 is significantly different from what is expected going into the trading day.

Third Lévy Flight of 2022 Sends S&P 500 Much Lower

It didn't take long for the S&P 500 (Index: SPX) to have a trading day qualify as "really interesting" by our standards, as Friday, 29 April 2022 delivered.

But what did it deliver after having already fallen off the proverbial edge? Simply put, investors have much more fully shifted their forward looking focus to 2022-Q2, thanks to increasing prospects the Fed will hike rates by three quarters of a point in June 2022. Here's how that growing realization looks on the dividend futures-based model alternative futures chart:

Alternative Futures - S&P 500 - 2022Q2 - Standard Model (m=-2.5 from 16 June 2021) - Snapshot on 29 Apr 2022

There's still room for the S&P 500 to fall lower, but without any erosion as yet in the expectations for future dividends, there's less immediate downside now than there was a week ago. The following market-moving headlines recap the random onset of new information that influenced the S&P 500's direction during the exciting and volatile week that was....

Monday, 25 April 2022
Tuesday, 26 April 2022
Wednesday, 27 April 2022
Thursday, 28 April 2022
Friday, 29 April 2022

The CME Group's FedWatch Tool projects the Fed will hike rates by a half point in May and June (2022-Q2) and again in July and September (2022-Q3). After that, the FedWatch tool anticipates quarter point rate hikes at six-week intervals through March 2023.

The BEA reported real GDP in 2022-Q1 fell by 1.4%, which was quite different from the Atlanta Fed's GDPNow tool's final forecast for a real gain of 1.3%. As expected, the GDPNow tool has shifted its focus toward 2022-Q2, where it anticipates a positive 1.9% real growth rate with respect to the level of 2022-Q1's real GDP level.

Update 4 May 2022

The day-over-day change in the S&P 500 definitely qualified as interesting today, after Fed Chair Jerome Powell took a 3/4% rate hike "off the table" for 2022-Q2 and possibly for 2022-Q3 as well. Investors immediately refocused their forward looking attention back toward 2022-Q3 in response. Here's how that change looks on the alternative futures chart whose purpose is to track these dynamics:

Alternative Futures - S&P 500 - 2022Q2 - Standard Model (m=-2.5 from 16 June 2021) - Snapshot on 4 May 2022

The Fed triggered the fourth Lévy flight of 2022 with investors shifting their future-oriented focus back toward 2022-Q3. With the Fed's expectation-setting actions now behind us and Q2 earnings season half over, we think it would take an exceptional development for investors to re-shift their focus back to the current quarter of 2022-Q2. Since such a shift would be accompanied by a large downward movement in the S&P 500, that now much lower probability represents a positive development in our book as we should now be on the opposite side of the volatility cluster.

So if such an apparently unlikely event happens, it won't be by accident. What could trigger such a reaction?

Update 5 May 2022

That last question was, in fact, a trick question. The thing that could trigger such a reaction is a sudden shift in the time horizon for investors, which on 5 May 2022, shifted strongly back toward 2022-Q2 from 2022-Q3. The reason: investors absorbed the new information of other nation's central banks implementing surprise rate hikes and called Jerome Powell's bluff that the Fed won't hike rates higher and faster to deal with the U.S.' higher relative rate of inflation. They've made new bets the Fed will be forced into a larger-than-half-point rate hike before the end of 2022-Q2. Here's what that looks like on the alternative futures chart:

Alternative Futures - S&P 500 - 2022Q2 - Standard Model (m=-2.5 from 16 June 2021) - Snapshot on 5 May 2022

Every time the forward-looking attention of investors strongly shifts from one point of time in the future to another, it qualifies as a new Lévy flight event by our definition. We're now up to five such events in 2022 and the only thing we'll guarantee at this point is that 2022 will experience at least one more Lévy flight event, which will happen sometime before the third Friday of June 2022. (When you read the previous sentence, put the emphasis on "at least one more"....)

This will be our last update to this post. We'll catch whatever happens on Friday, 6 May 2022 up with our next regular S&P 500 chaos series entry early on Monday, 9 May 2022. If you've been regularly following the series over the last several weeks, you're fully up-to-speed with the factors behind the U.S. stock market's recent volatility cluster.