Category Archives: chaos

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.

Garden Variety Noise Returns to the S&P 500

With no new Lévy flight events for the S&P 500 (Index: SPX), the recent volatility for the U.S. stock market settled down during the past week. In their place, the index substituted what we consider to be garden variety noise in its day-to-day trading activities.

By the end of the week, the level of the S&P 500 remains consistent with the dividend futures-based model projection associated with investors focusing their forward-looking attention on 2022-Q3. The latest update to the alternative futures chart confirms that assessment.

Alternative Futures - S&P 500 - 2022Q2 - Standard Model (m=-2.5 from 16 June 2021) - Snapshot on 3 Jun 2022

What the Fed will do with interest rates in September 2022 remains the key concern for investors, where whether the Fed takes a break from its current plan to hike the Federal Funds Rate by a half point every six weeks was put on the table a week earlier, only to be seemingly taken back off the table in the past week. Or not. Investors ended the week with more questions than answers about what the Fed will do at that future point of time, which is why it has become their primary time horizon.

Here are the market-moving headlines for the week ending 3 June 2022, where you can get a sense of both how and when investors were exposed to the news that altered their future expectations.

Tuesday, 31 May 2022
Wednesday, 1 June 2022
Thursday, 2 June 2022
Friday, 3 June 2022

The CME Group's FedWatch Tool still projects half point increases in the Federal Funds Rate after the Fed meets in June (2022-Q2) and July (2022-Q3). However, the FedWatch tool is now indicating a third half point rate hike in September (2022-Q3), up from the quarter point it forecast last week. That's followed by quarter point increases in November and December (2022-Q4). For its part, the Atlanta Fed's GDPNow tool turned more pessimistic in the past week. Its forecast of real GDP growth of 1.3% for the U.S. in 2022-Q2 is down from last week's projection of 1.9% annualized growth for the current quarter.

Expected Sixth Lévy Flight of 2022 Arrives for the S&P 500

The final week of May 2022 saw the S&P 500 (Index: SPX) deliver the index' sixth Lévy flight event of the year. In doing that, the index rose 6.6% from where it ended the previous week. The week-over-week increase breaks what had been the worst start for the S&P 500 for any year since 1939.

The move came as investors shifted their forward looking attention away from 2022-Q2 toward 2022-Q3. This shift has been expected since investors drew in their focus on 2022-Q2 back on 5 May 2022. Here's what the shift in the time horizon of investors looks like on the latest update to the dividend futures-based model's alternative futures chart:

Alternative Futures - S&P 500 - 2022Q2 - Standard Model (m=-2.5 from 16 June 2021) - Snapshot on 27 May 2022

The news that prompted the shift were the 23 May 2022 comments by Atlanta Fed President suggesting the Federal Reserve would pause its planned rate hikes after September 2022 (2022-Q3). Such a pause would be needed should the economy slow faster than the Fed desires as it tries to slow inflation, so Bostic's comments effectively closed the door on the possibility of the Fed announcing a three-quarter point rate hike in 2022-Q2. His comments then combined with other news during the remainder of the week to redirect investors to reset their forward-looking attention onto 2022-Q3 as the period of interest to focus upon next.

All that was left was a short squeeze to provide the mechanism by which the large upward move in stock prices would take place. Here, a number of unlucky hedge fund managers were happy to fuel what became the S&P 500's sixth Lévy flight event of 2022.

We don't often call our shots, so let's recap the key part of last week's edition of our S&P 500 chaos series, where we did just that:

... the clock is ticking down for how long investors can continue to fix their focus on 2022-Q2, which points to a potential investing opportunity that will exist until their forward-looking attention does shift to another point of time in the future in what will be the stock market's next Lévy flight event.

The lowest risk part of that specific investing opportunity is now gone, but there's still some upside remaining. Provided of course that investor expectations for dividends in future quarters don't erode, which would coincide with the U.S. economy becoming so pinched by inflation and the Fed's attempts to rein it in that it falls into recession.

We did mention that investors were influenced by other news during the week. Here's our summary of the market moving headlines that made up the random onset of news that investors continuously absorb:

Monday, 23 May 2022
Tuesday, 24 May 2022
Wednesday, 25 May 2022
Thursday, 26 May 2022
Friday, 27 May 2022

The CME Group's FedWatch Tool is now projecting half point increases in the Federal Funds Rate after the Fed meets in June (2022-Q2) and July (2022-Q3), followed by quarter point increases at six week intervals through February 2023, topping out at 2.75%-3.00%.

The Atlanta Fed's GDPNow tool projects real GDP growth of 1.9% in 2022-Q2, down from last week's projection of 2.4%.

S&P 500 Investors Keep Focus Fixed on 2022-Q2 Awaiting the Fed’s Next Signals

The third week of May 2022 came and went with Federal Reserve officials signaling their willingness to hike interest rates higher than they've previously suggested. S&P 500 (Index: SPX) investors locked their forward-looking focus on the current quarter of 2022-Q2 in response, held there by the uncertainty of what will come from the decisions the Fed will make before its end.

That's what we read in the latest update to the alternative futures chart, which reveals the index is tracking remarkably closely to the alternative trajectory associated with investors focusing their attention on the current quarter according to the dividend futures-based model.

Alternative Futures - S&P 500 - 2022Q2 - Standard Model (m=-2.5 from 16 June 2021) - Snapshot on 20 May 2022

It's unusual for the actual trajectory of stock prices to track so closely along with a particular projection for investors focusing on a given quarter. We normally see more noise in day-to-day trading than we've had during the past week. That said, the clock is ticking down for how long investors can continue to fix their focus on 2022-Q2, which points to a potential investing opportunity that will exist until their forward-looking attention does shift to another point of time in the future in what will be the stock market's next Lévy flight event.

This assumes we don't see significant erosion in the expectations for dividends expected in the upcoming quarters to which investors might next shift their attention. Fortunately, that prospect is so far a low risk consideration for the near term.

Here are the market-moving news headlines that helped shape investor expectations in the week that was.

Monday, 16 May 2022
Tuesday, 17 May 2022
Wednesday, 18 May 2022
Thursday, 19 May 2022
Friday, 20 May 2022

The CME Group's FedWatch Tool continues to project the Fed will hike rates by a half-point in June (2022-Q2), followed by a two more half-point hikes in July and September (2022-Q3). After which, the tool projects the Fed will slow down, hiking rates by just a quarter point each in November and December 2022 (2022-Q4) to close out the year.

The Atlanta Fed's GDPNow tool projects real GDP growth of 2.4% in 2022-Q2, up from last week's projection of 1.8%.

What Should the Value of the S&P 500 Be?

Since the S&P 500 (Index: SPX) peaked at 4,796.56 on 3 January 2022, the index has dropped by 18.2% of that record high value. But that simple observation raises a question. What should the value of the S&P 500 be?

We have a couple of interesting ways to approach answering that question, the first of which relies upon how investors set the average level of the index with respect to its trailing year dividends per share during periods of relative order in the U.S. stock market. The following chart illustrates the five major periods of order the S&P 500 has experienced since December 1991, which have been periodically interrupted by periods of relative chaos.

S&P 500 Average Monthly Index Value vs Trailing Year Dividends per Share, December 1991-May 2022 (through 18 May 2022)

In the chart, we show the mathematical relationships that have applied during those relative periods of order, which connects the average monthly value of stock prices (y) with the level of the index' trailing year dividends per share (x). We've built the following tool to do the related math to see how investors would set the value of the S&P 500 for the period of order you select for the trailing year dividends per share you enter. If you're accessing this article on a site that republishes our RSS news feed, you may need to click through to our site to access a working version of the tool.

Alternate S&P 500 Valuation Criteria
Input Data Values
Relative Period of Order
Trailing Year Dividends per Share

Projected S&P 500 Index Value
Estimated Results Values
Index Value Corresponding to Selected Period of Order

Using the default selection of the most recent period of order, which lasted from December 2018 through February 2020, until the arrival of the coronavirus pandemic initiated a period of chaos for the U.S. stock market, we find that with May 2022's estimated $62.90 for trailing year dividends per share, the corresponding value of the S&P 500 would be $3,777.

Or rather, that's what the math suggests would be a reasonable level for the S&P 500 had that relative period of order continued to the present. Since that value is below the current level of the index, this result suggests stock prices still have room to fall, but it's important to note that this level is neither a ceiling nor a floor. It simply represents the mean to which stock prices would revert during this particular previous relative period of order.

That mean level is visualized as the extended trajectory for this relative period of order in the chart above, where you can see the chaotic impact the arrival of the coronavirus pandemic had in March 2020, followed by the bubble inflated by the COVID stimulus programs of 2020 and President Biden's inflation-generating American Rescue Plan Act stimulus program of March 2021. That bubble entered its deflation phase after December 2021, which is still underway today.

With more than one previous relative period of order to choose from, there's a lot of room for interpretation. Other selectable options, such as the one for the early 1990s, may suggest the S&P 500 is greatly undervalued for the dividends per share you enter. One of the cool things about this tool is you can do the math for any level of trailing year dividends per share you choose, so you can find out how stock prices could alternatively been set during the days of the Dot Com Bubble, if that's your area of interest, or during any of the other periods in between. Go ahead and take the tool for a test drive to explore the world of alternate S&P 500 valuations!

Can you project where the S&P 500 could go during periods of chaos?

We know what you're thinking. Wouldn't it be nice if you could project what a reasonable level for the S&P 500 would look like during periods of chaos for the stock market? It would indeed, and we have you covered there as well.

Alternative Futures - S&P 500 - 2022Q2 with m=-2.5 from 20210616 - Snapshot on 20220518

If you know what the expectations are for changes in the growth rate of dividends at different points of time in the future, and you know how far into the future investors are focusing their forward-looking attention as they set current day stock prices, you can reasonably project the level for the S&P 500 even during periods of chaos in the stock market. It has been possible since April 2009 and became practical to accomplish after November 2009, when the CBOE introduced modern quarterly dividend futures for the S&P 500.