Category Archives: chaos

S&P 500 Sits Around Looking for Direction

A restful brown bear photo by Mark Basarab via Unsplash - https://unsplash.com/photos/y421kXlUOQk

If investors in the S&P 500 (Index: SPX) were looking for direction from the newstreams for how to shape their portfolios, they didn't find much to influence them.

That's despite Friday, 15 September 2023 being a triple witching trading day for U.S. markets with the scheduled expiration of derivative contracts for stock options, stock-index options, and stock index futures that are often associated with higher-than-average volatility.

Without much news to motivate them, the index pretty much just sat around, mostly trading within 1.1% of where it closed the week before. The S&P 500 wrapped up the week at 4450.32, down 0.16% from where it closed the week before.

For the latest update to the dividend futures-based model's alternative futures chart, we find the index dipped just enough to move into the lower half of the redzone forecast range. Which is to say stock prices are behaving very predictably.

Alternative Futures - S&P 500 - 2023Q3 - Standard Model (m=+1.5 from 9 March 2023) - Snapshot on 15 Sep 2023

As far as dividends futures are concerned, 2023-Q3 came to an end on Friday, 15 September 2023 and we are now in 2023-Q4. We'll continue updating the 2023-Q3 alternative futures chart for another two weeks however before we roll the chart forward to show 2023-Q4.

Meanwhile, here's what passed as market-moving headline during the week that was:

Monday, 11 September 2023
Tuesday, 12 September 2023
Wednesday, 13 September 2023
Thursday, 14 September 2023
Friday, 15 September 2023

The CME Group's FedWatch Tool showed little change in the past week. It continues to show no rate hike when the Fed next meets on 19-20 September (2023-Q3). After which, the tool projects the Fed will hold rates steady until 12 June (2024-Q2), which is expected to mark the first of a series of quarter point rate cuts continuing at six-to-twelve-week intervals through the end of 2024.

The Atlanta Fed's GDPNow tool's forecast of annualized real growth rate during 2023-Q3 is +4.9%, falling from last week's prediction of +5.6% growth.

Image credit: Restful bear photo by Mark Basarab on Unsplash.

The S&P 500 Loses Its Silvery Luster

Broken silver iPhone photo by Fili Santillán via Unsplash - https://unsplash.com/photos/vzo-g6y3Xlw

The silver lining investors found in the S&P 500 (Index: SPX) in the previous trading week lost some of its luster. The index declined by 1.3% during the trading week ending on Friday, 8 September 2023, closing out the Labor Day-holiday shortened week at 4457.49.

Most of that decline took place during the first two trading days of the week, as oil prices rose and signs of bigger trouble developed in both China and the Eurozone. But the biggest trouble for the S&P 500 came on Wednesday, 6 September, when news came China's leaders would order Chinese government agencies to stop using iPhones. Apple (NASDAQ: AAPL) is the biggest single component of the S&P 500 index, so a bad day for Apple's stock automatically weights the index down. Apple's stock price dropped by 6% by the end of the week, accounting for about a third of the index' overall decline by itself.

For the entire index, the week's decline puts its trajectory close to the middle of the latest redzone forecast range on the latest update to the alternative futures chart.

Alternative Futures - SP 500 - 2023Q3 - Standard Model (m=+1.5 from 9 March 2023) - Snapshot on 8 Sep 2023

Other stuff also happened during the past week, which probably accounts for the rest of the S&P 500's downward movement. Here's our summary of the week's market moving headlines.

Tuesday, 5 September 2023
Wednesday, 6 September 2023
Thursday, 7 September 2023
Friday, 8 September 2023

The CME Group's FedWatch Tool was comparatively unchanged in the past week. It continues to show no rate hike when the Fed next meets on 19-20 September (2023-Q3). After which, the tool projects the Fed will hold rates steady until 1 May (2024-Q2), which is expected to mark the first of a series of quarter point rate cuts continuing at six-to-twelve-week intervals through the end of 2024.

The Atlanta Fed's GDPNow tool held steady in forecasting an annualized real growth rate of +5.6% during 2023-Q3. That's well above the so-called "Blue Chip Consensus" that anticipates real GDP growth during 2023-Q3 somewhere in a range between +1.1% and +3.4%, with a midrange estimate of about +2.4%.

Image credit: Photo by Fili Santillán on Unsplash.

The S&P 500 Rises as Investors Find Silver Lining in Darker Jobs Cloud

Every Cloud Has a Silver Lining photo by Colin Smith via Geograph Britain and Ireland - https://www.geograph.org.uk/photo/3086458

The S&P 500 (Index: SPX) had one of its best weeks of 2023. The index closed the trading week ending on 1 September 2023 at 4515.77, which was up 2.5% from the previous week's close.

The reason why stock prices rose however is because of negative changes in the outlook for jobs in the U.S. The biggest driver was a large reduction in the number of job openings, which dropped to their lowest level since March 2021.

That assessment of a softening job market was reinforced with 1 September 2023's employment situation report, which showed an increase in the unemployment rate.

For the stock market however, these negative developments produced a positive result, as investors bet on the bad jobs news taking any additional interest rate hikes in 2023 off the table. Prior to the week's jobs-related news, investors were giving a greater than 50% probability of at least one more quarter point rate hike in 2023. The elimination of that probability is positive for stocks, especially for those firms that rely heavily on debt financing, who investors believe will benefit from having higher profits from lower-than-previously-expected interest costs. It's the proverbial silver lining on a dark cloud.

The S&P 500 moved up into the upper portion of the newly added redzone forecast range in the latest update of the dividend futures-based model's alternative futures chart.

Alternative Futures - S&P 500 - 2023Q3 - Standard Model (m=+1.5 from 9 March 2023) - Snapshot on 1 Sep 2023

Overall, stock prices are behaving as expected with investors continuing to focus their attention on the final quarter of 2023 in setting current day stock prices.

Here's our summary of the week's market moving headlines:

Monday, 28 August 2023
Tuesday, 29 August 2023
Wednesday, 30 August 2023
Thursday, 31 August 2023
Friday, 1 September 2023

The CME Group's FedWatch Tool continues to show no rate hike in September (2023-Q3). The big change from last week came as investors stopped betting one last quarter point rate hike later in 2023 following the past week's jobs report and downward revisions in previous months' employment numbers. Now investors expect the Fed will hold rates steady until 1 May 2024, when they anticipated the Fed will start a series of quarter point rate cuts that will continue at six-to-twelve-week intervals through the end of 2024.

The Atlanta Fed's GDPNow tool predicts an annualized real growth rate of +5.6% during 2023-Q3, down from the previous week's estimate of +5.9% growth.

Image credit: Every Cloud Has a Silver Lining photo by Colin Smith via Geograph Britain and Ireland. Creative Commons. Attribution-ShareAlike 2.0 Generic (CC BY-SA 2.0).

S&P 500 Investors React to Powell’s J-Hole Speech with Focus on Fed’s Next Rate Actions

Steering Wheel photo by orbtal media via Unsplash - https://unsplash.com/photos/Esq0ovRY-Zs

For the S&P 500 (Index: SPX), there may as well have been only one event taking place during the past week.

That event was the Federal Reserve's annual getaway meeting at Jackson Hole, Wyoming, at which Fed Chair Jerome Powell addressed inflation and the Fed's path ahead in charting a course to deal with it on Friday, 25 August 2023. Compared to the speech Powell gave last year, this year's speech was more positive for investors. The S&P 500 (Index: SPX) rose after Powell's speech, ultimately ending the week at 4405.71, a 0.8% increase over the prior week's close.

For us, because of intense interest investors have for the direction for the Federal Reserve's monetary policies, Powell's speech serves as a calibration point for setting the value of the multiplier in the dividend futures-based model. The event allowed us to confirm our current estimate of the multiplier's current value of +1.5 is still valid, with investors closely focused on the upcoming fourth quarter of 2023, which coincides with the expected timing of the Fed's next actions to change interest rates.

Here's what that looks like on the latest update for the alternative futures chart:

Alternative Futures - S&P 500 - 2023Q3 - Standard Model (m=+1.5 from 9 March 2023) - Snapshot on 25 Aug 2023

Speaking of charting courses, that brings us to our next challenge. The chart indicates the accuracy of the dividend futures-based model's projections of the future for the S&P 500 will soon be impacted by the echo effect. This is a consequence of using historic stock prices as the base reference points from which the model's projections of the future are made, where the past volatility of stock prices affects the model's projections of the future.

To compensate for that effect, we've added a new redzone forecast range to the chart, which we've anchored at the level of the S&P 500 on Friday, 25 August 2023. The opposite end of the forecast range is anchored to the projections associated with investors focusing on 2023-Q4 on 7 November 2023, after the echoes of past stock price volatility have dissipated.

Here's that version of the chart, which we'll be updating and presenting in the weeks ahead.

Alternative Futures - S&P 500 - 2023Q3 - Standard Model (m=+1.5 from 9 March 2023) - Redzone Forecast Range 2023-Q4 from 25 Aug 2023 through 7 Nov 2023 - Snapshot on 25 Aug 2023

Since we discussed how we generate redzone forecast ranges in previous editions of the S&P 500 chaos series, we won't repeat that description here. Let's get to the handful of market-moving headlines that appeared in the newstreams of the past week.

Monday, 21 August 2023
Tuesday, 22 August 2023
Wednesday, 23 August 2023
Thursday, 24 August 2023
Friday, 25 August 2023

The CME Group's FedWatch Tool continues to show no rate hike in September (2023-Q3), though it gives a greater than 50% probability the Fed will hike rates by a quarter point when it meets on 1 November (2023-Q4), which is now expected to stick nearly all the way through January 2024. However, on 31 January (2024-Q1), investors now expect the Fed to start a series of quarter point rate cuts that will continue at six-to-twelve-week intervals through the end of 2024.

The Atlanta Fed's GDPNow tool now predicts an annualized real growth rate of +5.9% during 2023-Q3 which is up a tick from the previous week's estimate of +5.8%.

Image credit: Photo by orbtal media on Unsplash.

S&P 500 Drops as Outlook for Banks, China Get Worse

Downward pointing pink arrow neon sign by Ussama Azam via Unsplash - https://unsplash.com/photos/26h317_UMYM

There were two sets of news headlines that combined to impact the U.S. stock market during the trading week ending Friday, 18 August 2023.

Domestically, Fitch Rating's threatened downgrade of a dozen banks in the U.S., including JP Morgan Chase (NYSE: JPM) underscored the growing risks on their balance sheets from the Federal Reserve's series of rate hikes. The rate hikes have resulted in the rapid accumulation of unrealized losses for banks with large holdings of U.S. Treasuries, putting them at risk of failing like Silicon Valley Bank and other smaller banks did earlier in the year.

Internationally, the biggest economic story in the world continues to be China's sputtering economy. The Chinese government's action to terminate the reporting of its youth employment statistics revealing its developing troubles indicates those building problems are bigger than it wants to admit. At the same time, the government's official economic statistics agency is attempting to minimize the perceived risk to China's economy from the heavy debts of its real estate sector and the country's local governments.

For the S&P 500 (Index: SPX), the looming potential downgrades of U.S. banks carried more weight, leading the index to fall to 4369.71, a 2.1% decline from the previous week’s close. Here's the latest update to the alternative futures chart for the third quarter of 2023:

Alternative Futures - S&P 500 - 2023Q3 - Standard Model (m=+1.5 from 9 March 2023) - Snapshot on 18 Aug 2023

We've refrained from adding a redzone forecast chart to account for the deviation from the dividend futures-based model's projections over the last couple weeks for two reasons. First, the current deviation from the model's echo effect will be short-lived, as we expect the trajectory of the index to rejoin the model's projections on Friday, 25 August 2023. That will coincide with Jerome Powell's address at the Federal Reserve's Jackson Hole annual summer get-a-way.

Second, we'll be using that date as the starting anchor point for a much longer redzone forecast range that will last into mid-November 2023. We'll be adding that new redzone forecast range to the chart in the next edition of the S&P 500 chaos series.

But, that doesn't mean you can't sketch your own redzone forecast range on the chart for this short period! All you need to do is connect the dots for where the S&P 500 was on Monday, 7 August 2023 with where the dividend futures-based model projects it will be on Friday, 25 August 2023.

That raises the question of "which projection?", but that's easily answered. Investors are currently focused on 2023-Q4 in setting current day stock prices, so you would use the projection associated with that future quarter. It's not your imagination. It really is that easy, and the S&P 500 is already about two-thirds of the way there!

Here is our summary of the past week's market moving headlines:

Monday, 14 August 2023
Tuesday, 15 August 2023
Wednesday, 16 August 2023
Thursday, 17 August 2023
Friday, 18 August 2023

The CME Group's FedWatch Tool developed an interesting quirk this week. While it continues to show no rate hike in September (2023-Q3), it is now giving a greater than 50% probability the Fed will hike rates by a quarter point when it meets on 1 November (2023-Q4). But only for six weeks, because it also shows the Fed reversing to cut rates by a quarter point just six weeks later in December (2023-Q4). After that, it anticipates no other rate changes through May 2024, followed by a series of quarter point rate cuts will begin as early as 12 June (2024-Q2) and continue at six-to-twelve-week intervals through the end of 2024.

The Atlanta Fed's GDPNow tool strapped its estimate of real GDP growth in 2023-Q3 onto a rocket in the last week. It is now predicting annualized real growth of +5.8%, which is up a lot from the previous week's estimate of +4.1%. It's also much higher than the top end of the projected range for the so-called "Blue Chip Consensus" for the quarter. We'll find out which set of forecasters is more right a little over two months from now.

Image credit: Photo by Ussama Azam on Unsplash.