The S&P 500 Runs Into President Biden’s Wall of Inflation

The daily action of the S&P 500 (Index: SPX) nearly crossed the threshold of becoming very interesting last week. For us, we define "very interesting" as being a three percent change from its previous day's closing value. But ultimately, the index came up short, ending the trading week at 3,900.86 after dropping 2.91% on Friday, 10 June 2022.

That nearly very interesting decline happened because the Consumer Price Inflation report came in much hotter than expected, confirming President Biden's inflation still hasn't been slowed. Because that's the case, the report shifted a portion of the forward-looking attention of investors back toward the current quarter of 2022-Q2. The new information about U.S. inflation puts more attention on what the Federal Reserve may do about it when they meet next week, accounting for the partial shift.

But not a full shift, for the practical reason of the coming expiration of dividend futures contracts for 2022-Q2. With those contracts expiring on Friday, 17 June 2022, investors kept a majority of their focus on 2022-Q3 as their primary time horizon.

At least, that's what we can divine from the latest update to 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 10 Jun 2022

It's possible this change will become large enough to fully qualify as a new Lévy flight event. On that count, we'll find out for sure soon enough, and no later than at the end of the Fed's two day meeting on Wednesday, 15 June 2022.

Until then, here's our recap of the market moving headlines of the trading week ending 10 June 2022, where you can see investors began absorbing the news U.S. inflation would come in higher than previously anticipated on Thursday, 9 June 2022. Before that point in time, we would describe the day-to-day volatility of the index as being consistent with garden-variety noise.

Monday, 6 June 2022
Tuesday, 7 June 2022
Wednesday, 8 June 2022
Thursday, 9 June 2022
Friday, 10 June 2022

Combining Thursday and Friday's investor reactions to news of higher than expected inflation in the U.S., the S&P 500 lost 5.3% of its value in response. The index was down 5.1% for the week, where that smaller change indicates the index was rising before the higher inflation news arrived.

A lot changed for expectations of the Federal Reserve's plan to hike rates in the latter part of the trading week ending on 10 June 2022. The CME Group's FedWatch Tool is projecting a half point rate hike to be announced after the Fed meets next week (2022-Q2), with a greater than 20% probability they'll boost it to a three-quarter point hike. Beyond that, the FedWatch tool now also expects a three-quarter point rate hike just six weeks later (2022-Q3), followed by another half point rate hike in September 2022 (also 2022-Q3), which has become the future quarter of interest for investors to focus their forward-looking attention.

The Atlanta Fed's GDPNow tool turned even more pessimistic in the past week. Its forecast of real GDP growth of 0.9% for the U.S. in 2022-Q2 is down from last week's projection of 1.3% annualized growth. If that downward trend continues, it suggests the U.S. economy is potentially in the midst of experiencing two consecutive quarters of real GDP shrinkage, which many associate with the economy being in recession.

Update 13 June 2022, 11:00 PM EDT: A New Lévy Flight Event

It's official. This is the seventh Lévy Flight event of 2022. Investors have fully shifted their attention back to the current quarter of 2022-Q2, waiting to see what the Fed will do next. There are surging expectations that the Fed will hike rates on Wednesday by at least 75 basis points (three-quarters of a percent), rather than the 50 basis point rate hike the Fed's minions had been signaling for weeks.