S&P 500 Jumps as Fed Signals Rate Hikes to Shrink, End Sooner

The S&P 500 (Index: SPX underwent its eleventh Lévy flight event of 2022, jumping to close out the third week of October 2022 at 3,752.75, up 159.99 points (+4.4%) from the previous week's close.

That's an exciting development, because while previous swings in recent weeks have come close, they weren't quite large enough to qualify as a full Lévy flight event where investors shift their forward looking focus from one point of time in the future to another. For this latest event, it appears investors shifted their attention from 2023-Q3 inward to the nearer term future of the current quarter of 2022-Q4.

Alternative Futures - S&P 500 - 2022Q4 - Standard Model (m=+2.0 from 13 September 2022) - Snapshot on 21 Oct 2022

That change coincides with signals members of the Federal Reserve sent, mainly on Friday, 21 October 2022, that they were looking to reduce the size of their expected rate hike in December 2022. Previously, investors were anticipating another three-quarter point rate hike in December, but were focusing on 2022-Q2 because that period coincided with when they expected the Fed's current series of rate hikes would peak.

We don't know how long investors might hold their attention on 2022-Q4. If investors become more concerned about the timing of when the Fed's rate hikes will top out, it would make sense for them to shift their focus to the next future quarter of 2023-Q1. The alternative futures chart indicates the Lévy flight that would coincide with such a change would be a low energy event. Stock prices could simply move mostly sideways to achieve that result. Meanwhile, if investors shift their term horizon back to 2023-Q2, the S&P 500 would see a noteworthy decline.

The only thing we know for sure is that investors will shift their investment horizon away from the current quarter at some point, and will absolutely do so by the end of the third Friday in December 2022.

When that happens will be subject to the random onset of new information. Speaking of which, here are the market-moving headlines we noted during the week that was.

Monday, 17 October 2022
Tuesday, 18 October 2022
Wednesday, 19 October 2022
Thursday, 20 October 2022
Friday, 21 October 2022

The CME Group's FedWatch Tool continues to project a three-quarter point rate hike when the FOMC next meets on 2 November 2022, but pulled back to project just a half point rate hike on 14 December (2022-Q4) following Friday's signals from the Fed. In 2023, the FedWatch tool now projects just a single half point rate hike in February (2023-Q1), setting the top for the Federal Funds Rate's target range at 4.75-5.00% and holding at that level for much of the rest of the year. Looking further forward, the FedWatch tool anticipates a quarter point rate cut in December (2023-Q4).

The Atlanta Fed's GDPNow tool's projection for real GDP growth in the recently ended calendar quarter of 2022-Q3 is +2.9%. The Bureau of Economic Analysis will provide its first official estimate of real GDP growth in 2022-Q3 on 27 October 2022, so the GDPNow tool should soon start forecasting real GDP for 2022-Q4.