The S&P 500’s Gaps Down on Coronavirus Pandemic Developments

A lot can happen to the outlook for the S&P 500 (Index: SPX) with the random onset of new information.

Friday, 26 November 2021 provides a good example. After having been closed for the Thanksgiving holiday, what is normally a low volume trading day instead turned into a noteworthy event because of the development of what is now being called the Omicron variant of the SARS-CoV-2 coronavirus, which prompted new global travel restrictions with the countries in Africa where the new potentially vaccine-resistant variant was detected.

The initial events related to the new variant took place while U.S. markets were closed on Thursday, 25 November 2021, so by the time markets opened on Friday, stock prices gapped down at the open, then proceeded to close some 2.27% lower than they had previously closed on Wednesday, 24 November 2021.

From our perspective, the change in stock prices is consistent with a small Lévy flight event, as U.S. investors shifted their attention from 2022-Q2 inward toward the nearer term quarters of either 2021-Q4 or 2022-Q1. As it happens, that change moves the trajectory of the S&P 500 from the upper edge of the redzone forecast range on the alternative futures chart back into the middle of the range, which is telling.

Alternative Futures - S&P 500 - 2021Q4 - Standard Model (m=-2.5 from 16 June 2021) - Snapshot on 26 Nov 2021

We're able to make that determination because of the assumptions we made when we initially set up the redzone forecast range many weeks ago. We had assumed investors would be focusing on the upcoming quarter of 2022-Q1 in the final weeks of 2021-Q4, where we set the middle of the future end of the range to correspond to the dividend futures-based model's projection for what the level of the S&P 500 index would be if investors were focusing on that point of time in the future. (The trajectory associated with 2022-Q1 is not much different from that for 2021-Q4, which is why we say investors may be focusing on either of these quarters.)

We're also fortunate in that we're near the end of period where the past volatility of stock prices prompted us to generate a redzone forecast range in the first place. Just looking a little further forward to the end of the forecast range to look at the relative positions of the trajectories for 2021-Q4/2022-Q1 and 2022-Q2 confirms a shift in investor focus from 2022-Q2 toward the earlier quarters would lead to a shift in the level of the S&P 500 of the magnitude that has occurred.

Since this is an example of how the random onset of new information affects stock prices, here are the headlines we noted for their market-moving potential during the holiday-shortened Thanksgiving trading week.

Monday, 22 November 2021
Tuesday, 23 November 2021
Wednesday, 24 November 2021
Thursday, 25 November 2021
Friday, 26 November 2021

The CME Group's FedWatch Tool is still projecting a quarter point rate hike in June 2022, the odds of additional hikes later in the year have dropped below 50% with last week's pandemic developments.