Category Archives: chaos

The S&P 500 Charges Higher on Promise of AI Tech

Bullfight at San Marcos Fair, Aguascalientes, Mexico by Tomas Castelazo via Wikimedia Commons - https://commons.wikimedia.org/wiki/File:San_marcos_bullfight_01.jpg

The fourth trading week of May 2023 had started out to be a gloomy one for the S&P 500 (Index: SPX). Several Federal Reserve officials signaled early in the week they were considering continuing the Fed's ongoing series of rate hikes in June because of their concerns U.S. inflation has not sufficiently abated.

That potential was enough to send the index down nearly 1.9% from the previous week's close by Wednesday, 24 May 2023.

But the fear that dragged stock prices down reversed during the next two trading days, as a "Unprecedented. Cosmological. Unfathomable." earnings report and outlook from Nvidia (NASDAQ: NVDA) sparked a speculative fury benefiting information technology firms advancing on the potential of their new Artificial Intelligence (AI) systems.

That speculative fury drove the level of the S&P 500 some 2.2% higher from where it bottomed, enough to boost the index by 0.3% from the previous week's close to 4205.45, its highest level to date in 2023. And that was *despite* Friday, 26 May 2023's confirmation U.S. inflation is running hotter than expected, all but guaranteeing the Fed will hike the Federal Funds Rate in June 2023.

That volatile action is shown in the latest update to the alternative futures chart, where we find the index' trajectory is still well within the redzone forecast range.

Alternative Futures - S&P 500 - 2023Q2 - Standard Model (m=+1.5 from 9 March 2023) - Snapshot on 26 May 2023

More stuff happened during the week that was, which we've captured in the week's market-moving headlines. Once again, we've all but omitted headlines related to the debt ceiling debate in the U.S., which still isn't moving the needle for stock prices in any meaningful way.

Monday, 22 May 2023
Tuesday, 23 May 2023
Wednesday, 24 May 2023
Thursday, 25 May 2023
Friday, 26 May 2023

Following personal consumption expenditure data that revealed higher than expected inflation, the CME Group's FedWatch Tool now projects the Federal Reserve will hike the Federal Funds Rate by a quarter point when its Open Market Committee meets on 14 June 2023. That would bring the Federal Funds Rate to a target range of 5.25-5.50%, which the tool anticipates will be the peak for the series of rate hikes that began in March 2022. However, the FedWatch Tool anticipates the Fed will then wait until its 1 November (2023-Q4) meeting to initiate a series of quarter point rate cuts at six-to-twelve-week intervals to address building recessionary conditions in the U.S. economy.

The Atlanta Fed's GDPNow tool estimate of the real GDP growth rate for 2023-Q2 plunged to +1.9% from the +2.9% growth rate it anticipated a week earlier.

Image credit: Bullfight at San Marcos Fair, Aguascalientes, Mexico by Tomas Castelazo via Wikimedia Commons. Creative Commons. Attribution-ShareAlike 3.0 Unported (CC BY-SA 3.0).

The S&P 500 Rises on Positive Signs for Regional Banks

Deposit Into Piggy Bank Savings Account</a> by Ken Teegardin via Wikimedia Commons - https://commons.wikimedia.org/wiki/File:Deposit_Into_Piggy_Bank_Savings_Account_(6093700157).jpg

The S&P 500 (Index: SPX) rose 1.65% over its previous week's closing value to end the third week of May 2023 at 4191.98.

It rose primarily as a result of an improved outlook for regional bank stocks, which notably surged during the week. The biggest market moving news of the week came on Wednesday, 17 May 2023, after news Western Alliance had seen its deposits grow by more than $2 billion was disclosed. That announcement was taken as a positive sign that the solvency problems facing regional banks because of the Federal Reserve's series of interest rate hikes is less widespread than had been feared.

That promising development was enough to put the trajectory of the S&P 500 just a little below the middle of the alternative futures chart's redzone forecast range. Which is to say that stock prices are behaving predictably. It is also to say that stock prices are not behaving exceptionally in any way.

Alternative Futures - S&P 500 - 2023Q2 - Standard Model (m=+1.5 from 9 March 2023) - Snapshot on 19 May 2023

We're making that point because the past week's market-related headlines have been jam-packed of references to the debt ceiling debate in Washington, D.C. So many, in fact, it seems to be more the result of an editorial decision to cram it into as many headlines as possible, regardless of whether it's appropriate, than it does of any real market-moving news events. Through 19 May 2023, we find little to no evidence that political debate is having any meaningful material affect on the trajectory of stock prices.

The ongoing situation with regional banks because of their solvency issues however is having more noticeable impact. Here are the past week's market-moving headlines:

Monday, 15 May 2023
Tuesday, 16 May 2023
Wednesday, 17 May 2023
Thursday, 18 May 2023
Friday, 19 May 2023

The CME Group's FedWatch Tool continues to indicate investors believe the Fed has reached the end of the series it began in March 2022 to combat President Biden’s inflation. However, the FedWatch Tool has pushed back its projection for how long the Fed will hold the Federal Funds Rate at a target range of 5.00-5.25%. It now anticipates will wait until its 1 November (2023-Q4) meeting to initiate a series of quarter point rate cuts at six-to-twelve-week intervals to address building recessionary conditions in the U.S. economy.

The Atlanta Fed's GDPNow tool projects a real GDP growth rate of +2.9% in 2023-Q2, up from the +2.9% growth rate it anticipated a week earlier.

Image credit: Deposit Into Piggy Bank Savings Account by Ken Teegardin via Wikimedia Commons. Creative Commons. Attribution-ShareAlike 2.0 Generic (CC BY-SA 2.0).

An Uneventful Week for the S&P 500

A red panda bear yawns in a tree by Joshua J. Cotten via Unsplash - https://unsplash.com/photos/qdG1s7Kzj1o

After the previous week's Fed-driven volatile action, investors got some relief in the second week of May 2023.

Despite the relative stillness, there wasn't enough positive news to offset the negative to boost the U.S. stock market higher. The S&P 500 (Index: SPX) closed the week at 4124.08, down 0.3% from the previous week's level.

The market's most distressed sectors continue to be those most negatively impacted by the Fed's series of rate hikes, which includes regional banks, commercial real estate investment trusts, and financial services firms. That assessment is based on our regular sampling of firms announcing reduced dividend payouts this month, which includes smaller firms that aren't found in the S&P 500.

Meanwhile, the larger cap firms that make up the index have been turning in better than expected earnings, so the news is not all gloomy. We'll revisit the earnings outlook for the S&P 500 later this week, but first, here's the latest update to the alternative futures chart,

Alternative Futures - S&P 500 - 2023Q2 - Standard Model (m=+1.5 from 9 March 2023) - Snapshot on 12 May 2023

The trajectory of the S&P 500 continues to track well within the redzone forecast range indicated on the chart.

But then, that's exactly what should be expected for such an overall uneventful week. Here is our summary of what passed for the week's market-moving headlines.

Monday, 8 May 2023
Tuesday, 9 May 2023
Wednesday, 10 May 2023
Thursday, 11 May 2023
Friday, 12 May 2023

As in previous weeks, we've omitted the week's news coverage of the debt ceiling debate in Washington, D.C. in this week's summary. For all the headlines being generated about it, there's little sign it's contributing more than minimal noise to the trajectory of stock prices at this point of time. That may change and, if and when it does, we'll take note of whatever news it is that moves the needle for stock prices.

The CME Group's FedWatch Tool continues to indicate investors believe the Fed has reached the end of the series it began in March 2022 to combat President Biden’s inflation. The FedWatch Tool continues to project the Fed will hold the Federal Funds Rate at a target range of 5.00-5.25% until its 20 September (2023-Q3) meeting, at which time the Fed will initiate a series of quarter point rate cuts at six-to-twelve-week intervals to address building recessionary conditions in the U.S.

The Atlanta Fed's GDPNow tool projects a real GDP growth rate of +2.7% in 2023-Q2, up slightly from the +2.5% growth rate it anticipated a week earlier.

Image credit: Photo by Joshua J. Cotten on Unsplash.

Fed Drives Volatility for the S&P 500

Full focus at a coffee shop by Tim Gouw via Unsplash - https://unsplash.com/photos/1K9T5YiZ2WU

In closing at 4136.25 in the trading week ending on Friday, 5 May 2023, the S&P 500 (Index: SPX) ended the week down just 0.8%. But that number doesn't quite express the extent to which volatility affected the index during the week that was.

The biggest market-moving news of the week was the Federal Reserve's quarter point rate hike, which its Federal Open Market Committee accompanied with a statement indicating they are considering changing direction. Despite being the biggest news covered in the media, because this move was well anticipated, it had very little effect on stock prices when it was officially announced at 2:00 PM EDT. That calm lasted for all of an hour, as stock prices began falling sharply after 3:05 PM.

What sent stock prices falling was new information that emerged during Federal Reserve Chair Jerome Powell's press conference, which had begun at 2:30 PM. We know from long observational experience that stock prices will begin reacting to news it wasn't expecting within 2-4 minutes after it arrives.

The new information that sent stock prices tumbling came in response to a question by Bloomberg Radio and Television's Michael McKee. Here's the full exchange:

MICHAEL MCKEE. Michael McKee for Bloomberg Radio and Television. Can you tell us something about what your policy reaction function is, your policy framework is going forward? When you look at the economy at the next meeting, are you looking at incoming data, which is, by definition, backward looking? Are you going to be forecasting what you think is going to happen? Are you ruling out the rate cuts that the market has priced in?

CHAIR POWELL. I didn't catch the last part. Rolling.

MICHAEL MCKEE. Markets have priced in rate cuts by the end of the year. Do you rule that out?

CHAIR POWELL. Yes. I'm sorry. Okay. I got it. So what are we looking at? I mean, we look at a combination of data and forecasts. Of course, the whole idea is to create a good forecast based on what you see in the data. So we're always, always looking at both. You know, and it will -- of course it'll be the obvious things. It'll be readings on inflation. It'll be readings on wages, on economic growth, on the labor market, and all of those many things. I think a particular focus for us going now over the past six, seven weeks now and going forward is going to be what's happening with credit tightening, are small- and medium-sized banks tightening credit standards, and is that having an effect on loans, on lending? And, you know, so we can begin to assess how that fits in with monetary policy. That'll be an important thing. I just -- you know, we'll be looking at everything. It's -- again, I would just point out we've raised rates by five percentage points. We are shrinking the balance sheet. And now we have credit conditions tightening, not just in the normal way but perhaps a little bit more due to what's happened. And we have to factor all of that in and make our assessment of -- you know, of whether our policy stance is sufficiently restrictive. And we have to do that in a world where policy works with long and variable legs. So this is challenging. But, you know, we will make our best assessment, and that's what we think.

MICHAEL MCKEE. What about the idea of rate cuts?

CHAIR POWELL. Yeah. So we -- on the Committee, have a view that inflation is going to come down, not so quickly, but it'll take some time. And in that world, if that forecast is broadly right, it would not be appropriate to cut rates, and we won't cut rates. If you have a different forecast and, you know, markets -- or have been from time to time pricing in, you know, quite rapid reductions in inflation, you know, we'd factor that in. But that's not our forecast. And, of course, the history of the last two years has been very much that inflation moves down. Particularly now, if you look at non-housing services, it really, really hasn't moved much. And it's quite stable. And, you know, so we think we'll have to -- demand will have to weaken a little bit, and labor market conditions -- conditions may have to soften a bit more to begin to see progress there. And, again, in that world, it wouldn't be -- it wouldn't be appropriate for us to cut rates.

Powell's indication the Fed would hold rates higher for longer than investors' previous expectations sent stocks much lower very quickly, as investors adapted their expectations of the Fed's next monetary policy steps. The S&P 500 went from being up half a point from where it opened to close the day down 0.7%, all in less than an hour. It then fell further the next day, only recovering on Friday, 6 May 2023 on the strength of Apple's positive earnings news and the stabilization of expections for when the Fed would begin cutting interest rates.

More on that later. The combined effect of all this activity was to put the S&P 500's trajectory onto a volatile ride, only to end the week just a bit below the mid-point of the redzone forecast range on our alternative futures chart:

Alternative Futures - S&P 500 - 2023Q2 - Standard Model (m=+1.5 from 9 March 2023) - Snapshot on 5 May 2023

We've already covered the week's biggest market-moving news, but other stuff happened that also affected the forward-looking outlook for investors during the week that was. Here's our summary of those headlines:

Monday, 1 May 2023
Tuesday, 2 May 2023
Wednesday, 3 May 2023
Thursday, 4 May 2023
Friday, 5 May 2023

After the Fed’s quarter point rate hike on 3 May 2023, the target range for the Federal Funds Rate stands at 5.00-5.25%. The CME Group's FedWatch Tool anticipates the Fed will switch gears, with this target range marking the top for the series of rate hikes it initiated in March 2022 to combat President Biden’s inflation. The FedWatch Tool projects the Fed will hold the Federal Funds Rate at this level until its 20 September (2023-Q3) meeting, at which time the Fed will initiate a series of quarter point rate cuts at six-to-twelve-week intervals to address building recessionary conditions in the U.S. As of 5 May 2023, those cuts are expected to reduce the Federal Funds Rate’s target range to 2.75-3.00% by 6 November 2024 (2024-Q4), which is the most distant forecast currently available.

The Atlanta Fed's GDPNow tool projects a real GDP growth rate of +2.5% in 2023-Q2, up from the +1.7% growth rate it forecast a week earlier. The so-called "Blue-Chip" consensus forecast of real GDP growth in the current quarter of 2023-Q2 is more pessimistic with estimates ranging between -1.1% and +1.3%. The central estimate of the Blue-Chip forecast is for +0.2% annualized growth.

Image credit: Photo by Tim Gouw on Unsplash.

The S&P 500 Rebounds with Developing Recession Coming into View

Wall Street Sign (Angled up) by Kevin Ku via Unsplash - https://unsplash.com/photos/CeVj8lPBJSc

Thanks to a much lower than expected advance estimate of GDP and a rising probability of recession getting underway later in 2023, investors bid up stocks in anticipation the Fed's next rate hike, scheduled for 3 May 2023, will be the last of the series of hikes that began in March 2022.

The S&P 500 (Index: SPX) ended the week at 4169.48, rising 0.9% over its previous week's close. In between, stock prices had dived as low as 4,055.99 on Wednesday, 26 April 2023. Contemporary news reports attributed that decline to the combination of weak earnings coming on top of what was expected to be modestly strong economic growth to be reported later in the week, the combination of which would boost the likelihood the Fed would sustain the Federal Funds Rate at its expected peak level for an extended period before reversing course and cutting rates.

What changed that expectation was the worse-than-expected GDP estimate released on Thursday, 27 April 2023, which effectively moves up the expected timetable for rate cuts. That momentum carried through Friday, 28 April 2023, with the S&P 500 rising 2.8% from Wednesday's closing low for the week.

The alternative futures chart shows all that stock price action, but more importantly, shows it puts the level of the S&P 500's trajectory right in the middle of the indicated redzone forecast range.

Alternative Futures - S&P 500 - 2023Q2 - Standard Model (m=+1.5 from 9 March 2023) - Snapshot on 28 Apr 2023

We've already recapped the week's biggest market-moving headlines, but there was more going on during the week that was. Here's our summary of the major headlines we tracked during the week.

Monday, 24 April 2023
Tuesday, 25 April 2023
Wednesday, 26 April 2023
Thursday, 27 April 2023
Friday, 28 April 2023

The CME Group's FedWatch Tool anticipates the Fed will hike the Federal Funds Rate by a quarter point to a target range of 5.00-5.25% at its upcoming meeting on 3 May (2023-Q2). After that, the FedWatch tool anticipates a series of quarter point rate cuts starting from 20 September (2023-Q3) and continuing at six-to-twelve-week intervals through the CME FedWatch tool's available forecast period, which extends through 25 September 2024 (2024-Q3).

The BEA's initial estimate for real GDP growth in 2023-Q1 is +1.1%, which was substantially below the Atlanta Fed's GDPNow tool's projection of +2.5% for real GDP growth that we recorded last week. It was however closer, yet still below, the so-called Blue Chip consensus of +1.5%. The GDPNow tool has swung around to start looking forward again. As of 28 April 2023, it anticipates +1.7% real GDP growth for the currently playing out quarter of 2023-Q2.

Image source: Photo by Kevin Ku on Unsplash.