Category Archives: SP 500

The Deflation of the COVID/Biden Stimulus Bubble

The S&P 500 (Index: SPX) closed at a peak of 4,796.56 on 3 January 2022. In the six and half months since, the index has dropped by as much as 23.4% as measured by its daily closing values.

That sharp decline has reached a point where we can say the asset bubble the Federal Reserve began inflating in March 2020 and which President Biden's American Rescue Plan Act stimulus blew up even bigger through December 2021 is reaching a significant milestone. Based on the available data through 22 June 2022, the average monthly index value for the index is on track to intersect the projected trajectory the S&P 500 was on with respect to its trailing year dividends per share prior to the arrival of the coronavirus pandemic.

That means the COVID/Biden Stimulus Bubble, shown in red on the following chart tracking the relationship between the average monthly value of the S&P 500 and the index' trailing twelve month dividends per share, has almost fully deflated with respect to that last relative period of order over the last six months. Here's the chart:

S&P 500 Average Monthly Index Value vs Trailing Year Dividends per Share, December 1991-June 2022 (through 22 June 2022)

The following tool, updated from the version we introduced last month with a projection of June 2022's projected dividend data, reveals what the level of the S&P 500 would be if that period of order has continued to the present. 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 that lasted from December 2018 through February 2020, we find that with June 2022's estimated $63.51 trailing year dividends per share, the corresponding value of the S&P 500 would be $3,863. Or rather, had that relative period of order continued to the present, that's what the math suggests would be a reasonable monthly average for the S&P 500 to go along with this amount of dividends per share.

But that period of order hasn't existed since February 2020. In the current chaotic state of the market, stock prices can and have ranged well above and below this mean trend line. Until a new relative period of order is established, there is as yet no new mean to which stock prices could revert.

We'll close by presenting a version of the first chart showing its vertical and horizontal axes using logarithmic scale to provide sense of the relative magnitude of the stock market events shown on the chart.

S&P 500 Average Monthly Index Value vs Trailing Year Dividends per Share, Logarithmic Scale, December 1991-June 2022 (through 22 June 2022)

At this point, both the Dot-Com Bubble (April 1997-June 2003) and the 2008 Crash represent bigger stock market events than the COVID/Biden Stimulus Bubble. We'll find out soon enough how much more momentum there still is in the deflation phase of the current bubble event to see how much bigger this disruptive event for the market might become.

Previously on Political Calculations

The S&P 500 Enters Bear Market Territory as Fed Hikes Interest Rates

The story of what happened to the S&P 500 (Index: SPX) in the past is a simple one. After running into President Biden's wall of inflation the previous week, the index plunged into bear market territory. Through the end of the trading week ending 17 June 2022, the index was 23.4% below its 3 January 2022 record high peak.

Alternative Futures - S&P 500 - 2022Q2 - Standard Model (m=-2.5 from 16 June 2021) - Snapshot on 17 Jun 2022

From our perspective, after the May 2022 inflation report came in higher than expected, investors sent the S&P 500 lower in a new Lévy flight event, the seventh of 2022, as investors scrambled to shift their attention back toward 2022-Q2 from 2022-Q3. But with the expiration of 2022-Q2's dividend futures contracts on Friday, 17 June 2022, the market has effectively entered 2022-Q3, even though the calendar quarter won't click over for another two weeks.

We think investors will, once again, shift their forward-looking attention toward 2022-Q3, because what actions the Fed will take next as it scrambles to get ahead of inflation will hold the focus of investors on this quarter. We've updated the alternative futures chart to add a new redzone forecast range to indicate where stock prices will likely go during the next several weeks, also assuming no deterioration of expected dividends or outbreaks of noise in the market.

In the very short term, that redzone forecast range suggests a higher level for the index, but one that could be relatively short-lived. We peeked ahead at the dividend futures-based model's projections for 2022-Q3, and see that the redzone range continues to drop to roughly where stock prices are today.

We can also confirm the bubble the Federal Reserve inflated for the S&P 500 through its coronavirus pandemic response has now fully deflated. We'll explore the data supporting that assessment later this week.

Here are the market-moving headlines in the week the Federal Reserve was forced to hike the Federal Funds rate by 0.75%, its largest rate hike since 1994.

Monday, 13 June 2022
Tuesday, 14 June 2022
Wednesday, 15 June 2022
Thursday, 16 June 2022
Friday, 17 June 2022

After the Fed's 15 June 2022 three-quarter point rate hike, the CME Group's FedWatch Tool projects half point rate hike for both July and September 2022 (2022-Q3), then another half point rate hike in early November (2022-Q4). Beyond that the FedWatch tool anticipates three quarter point rate hies at six-week intervals from December (2022-Q4) and again in February 2023 (2023-Q1), topping out in the 3.75-4.00% range.

The Atlanta Fed's GDPNow tool turned even more pessimistic in the past week. Its forecast of real GDP growth of 0.0% for the U.S. in 2022-Q2 is down from last week's projection of 0.9% annualized growth. If that holds, it suggests the U.S. economy is in the midst of experiencing two consecutive quarters of real GDP shrinkage, which many people associate with the economy being in recession.

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%.