Category Archives: SP 500

The S&P 500 Swings Wildly on Changing Rate Hike Expectations

The first week of October 2022 saw the S&P 500 (Index: SPX) swing wildly along with investor expectations for future interest rates.

Starting from its Friday, 30 September 2022 closing value of 3,585.62, the index powered upward early in the week to reach a high of 3.790.93 by the close of trading on Tuesday, 4 October on the news the Royal Bank of Australia would not hike the interest rates it controls by as much as expected because of developing recessionary conditions. With the U.S. economy faced with the similar situation, investors began anticipating the Federal Reserve would also be forced to pull back its recent rate hike ambitions, which would perhaps peak in 2022-Q4, shifting investor attention toward that nearer term horizon.

That expectation had a short life thanks to a full court press by the Fed's minions on Thursday, 6 September, before being fully dashed by a stronger-than-expected September 2022 jobs report on Friday, 7 September 2022. The S&P 500 ended the trading week at 3,639.66, right in the middle of the alternative futures chart's redzone forecast range that assumes investors are focusing on the more distant future quarter of 2023-Q2.

Alternative Futures - S&P 500 - 2022Q4 - Standard Model (m=+2.0 from 13 September 2022) - Snapshot on 7 Oct 2022

Which is to say the index behaved as the dividend futures-based model suggests it should given where it started and how the investment horizon shifted with the week's changing expectations of the future. The week's action almost qualifies as two Lévy flight events, and would have had the index closed just 20 points higher on Tuesday, 4 October 2022. As it was, the index moved entirely within the range associated with investors focusing their forward-looking attention on 2023-Q2, so we cannot definitively reject the hypothesis that's all investors did during the week that was. We can only say they appear to have briefly shifted most of their attention from 2023-Q2 to 2022-Q4, before locking it back on 2023-Q2 again.

Here are the week's market moving headlines to color in the context behind the numbers from the week's trading action.

Monday, 3 October 2022
Tuesday, 4 October 2022
Wednesday, 5 October 2022
Thursday, 6 October 2022
Friday, 7 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, followed by a half point rate hike in December (2022-Q4). In 2023, the FedWatch tool projects a quarter point rate hike in February (2023-Q1), setting the top for the Federal Funds Rate's target range at 4.50-4.75%. After last week's stronger than expected jobs report, the FedWatch tool anticipates that rate will be held through most of the year, with a quarter point rate cut now expected in December (2023-Q4).

The Atlanta Fed's GDPNow tool's projection for real GDP growth in the just-ended calendar quarter of 2022-Q3 rose from +2.4% to +2.9% as the U.S. economy rebounded from the week first half of 2022. The Bureau of Economic Analysis will provide its first official estimate of real GDP growth in 2022-Q3 at the end of October 2022.

The S&P 500 Swoons to 25% Below 2022 Peak

The final week of September 2022 saw the S&P 500 continue the swoon that began on Tuesday, 13 September 2022. Measured from its closing value of 4,110.41 on Monday, 12 September 2022, the index has dropped by 524.79 points to end 2022-Q3 at 3,585.62. That level is now 25.2% below the S&P 500's all-time peak of 4,796.56 recorded on 3 January 2022.

Which is to say that it has only taken 14 trading days from when the August 2022 inflation report was released for the S&P 500 to rack up the equivalent of 43% of its total loss to date during 2022.

We've rolled the S&P 500 alternative futures chart forward to show 2022-Q4. In doing so, we've also included enough of September 2022 (2022-Q3) to show the aftermath of the regime change that took hold in the market after 12 September 2022.

Alternative Futures - S&P 500 - 2022Q4 - Standard Model (m=+2.0 from 13 September 2022) - Snapshot on 30 Sep 2022

In the previous edition of the S&P 500 chaos series, we were concerned the actual trajectory of the index was following the projected trajectory for investors focusing on 2023-Q2 too closely. That's because we're also in a period where the dividend futures-based model's projections of the potential futures for the index are being impacted by the echoes of the past volatility of stock prices. Since the model uses historic stock prices as the base reference points for its projections of the future, that echo effect means the model should be less accurate at this time.

This week's update confirms looks more like we would expect. We've added a redzone forecast showing where we would expect the actual trajectory of the S&P 500 to be outside that noise. We're showing the redzone forecast range as the typical plus-or-minus three percent we would expect in a typical market environment. Using it as a reference, we find the actual trajectory of index is tracking within a couple of percentage points below it.

The redzone forecast range represents what we would call the signal, it's where we would expect the index to be under ordinary conditions for investors. The gap between the actual trajectory and the redzone forecast range is what we would call noise. This difference represents the effects of speculation caused in part by the higher level of volatility unleashed in the new market regime.

We think investors are setting stock prices more negatively in the new market regime because of their developing expectations for how high the Federal Reserve will ultimately set interest rates. They are expected to peak in 2023-Q2, which is why that distant future quarter has become the primary focus for investors.

That's supported by the context provided by the market-moving headlines of the week that was. Here are the headlines we followed during the final trading week of September 2022.

Monday, 26 September 2022
Tuesday, 27 September 2022
Wednesday, 28 September 2022
Thursday, 29 September 2022
Friday, 30 September 2022

The CME Group's FedWatch Tool still projects a three-quarter point rate hike in early November followed by a half point rate hike in December (2022-Q4). In 2023, investors anticipate a quarter point rate hike in March (2023-Q1), setting to top for the Federal Funds Rate's target range at 4.75-5.00%. After that peak, the FedWatch tool indicates the Fed will be forced to swing into reverse, with a quarter point rate cut projected as early as May 2023 (2023-Q2).

The Atlanta Fed's GDPNow tool's projection for real GDP growth in the just-ended calendar quarter of 2022-Q3 rocketed up from +0.3% to +2.4% based on new data pointing to higher consumer spending and more private investment. The Bureau of Economic Analysis will provide its first official estimate of real GDP growth in 2022-Q3 at the end of October 2022.

Looking backward, the BEA's annual GDP revision confirmed the U.S. economy experienced a technical recession in the first two quarters of 2022 with two consecutive quarters of negative real growth.

Future Dividend Watch at the End of 2022-Q3

What does the future hold for the dividends of the S&P 500 (Index: SPX) now that we're reaching the end of the third quarter of 2022?

We're now in the gap between when the index' dividend futures contracts for 2022-Q3 have expired and the actual end of the calendar quarter. We find the outlook for the S&P 500's quarterly dividends per share improved since we checked them near the end of 2022-Q2. What's more, we also have a first look for dividend futures data extending through the end of 2023. The following chart reveals those expectations before the start of trading on Monday, 26 September 2022:

Past and Projected Quarterly Dividends Per Share Futures for S&P 500, 2021-Q4 Through 2023-Q4, Snapshot on 26 September 2022

Here's how the dividend futures forecast has changed for each quarter for which we presented data at the end of 2022-Q2:

  • 2022-Q3: Up $0.29 per share.
  • 2022-Q4: Up $0.63 per share.
  • 2023-Q1: Up $0.73 per share.
  • 2023-Q2: Up $0.40 per share.

As interest rates rise and recessionary pressures increase, we're starting to see firms like Fedex dial back their earnings forecasts, though not yet their dividends. It's an open question of how long that state of affairs can continue.

About Dividend Futures

Dividend futures indicate the amount of dividends per share to be paid out over the period covered by each quarters dividend futures contracts, which start on the day after the preceding quarter's dividend futures contracts expire and end on the third Friday of the month ending the indicated quarter. So for example, as determined by dividend futures contracts, the "current" quarter of 2022-Q3 began on Saturday, 18 March 2022 and will end on Friday, 16 September 2022.

That makes these figures different from the quarterly dividends per share figures reported by Standard and Poor, who reports the amount of dividends per share paid out during regular calendar quarters after the end of each quarter. This term mismatch accounts for the differences in dividends reported by both sources, with the biggest differences between the two typically seen in the first and fourth quarters of each year.

Reference

The past and projected data shown in this chart is from the CME Group's S&P 500 quarterly dividend index futures. The past data reflects the values reported by CME Group on the date the associated dividend futures contract expired, while the projected data reflects the values reported on 27 June 2022.

Evidence Mounts S&P 500 Enters New Market Regime

The S&P 500 (Index: SPX) continued falling in the third full trading week of September 2022, closing the week down 4.65% from the previous week's close, and a full 23.0% below its 3 January 2022 peak.

This decline is consistent with how the dividend futures-based model would set stock prices if the model's basic multiplier was suddenly reset from the value of -2.5 that has applied since 16 June 2021 to be +2.0 as of 13 September 2022, assuming investors are also focusing their attention on the distant future quarter of 2023-Q2:

Alternative Futures - S&P 500 - 2022Q3 - Standard Model (m=-2.5 from 16 June 2021) - Snapshot on 23 Sep 2022

We're surprised by how closely the trajectory of the S&P 500 is tracking along with the model's projection of the index' trajectory associated with investors focusing their attention on 2023-Q2. That's because the model has also entered a period when we expect its projections are being affected by the past volatility of the historic stock prices it uses as the base reference points for projecting the index' future potential trajectories based on how far into the future investors are looking. That's something we'll revisit next week, when we'll estimate how much of the decline in stock prices is attributable to noise and how much is signal based on how investors have changed their view of the market.

Speaking of which, we find other analysts are picking up on just how different today's market is from that of just two weeks ago. Here's how Reuters covered that development on Friday, September 23, 2022:

Across Wall Street, banks are scrambling to adjust their forecasts to account for a Federal Reserve that shows no evidence of letting up in its fight against inflation after delivering another market-bruising rate hike this week and signaling more severe monetary policy tightening ahead.

Once-reliable technical indicators are falling by the wayside. The S&P dipped below its mid-June low of 3,666 on Friday afternoon, erasing a sharp summer rebound in U.S. stocks – the first time in history the index breached a new low after erasing more than half of its losses.

A rout in bond markets added to the pressure on stocks — yields on the benchmark 10-year Treasury, which move inversely to prices, recently stood at 3.67%, their highest level since 2010.

“These are uncharted waters,” said Sam Stovall, chief investment strategist at CFRA Research. “The market right now is going through a crisis of confidence.”

Or rather, the market has entered a new regime. Here are the market-moving headlines from the week that was:

Monday, 19 September 2022
Tuesday, 20 September 2022
Wednesday, 21 September 2022
Thursday, 22 September 2022
Friday, 23 September 2022

After the Fed hiked the Federal Funds Rate to a target range of 3.00-3.25%, the CME Group's FedWatch Tool projects a three-quarter point rate hike when the FOMC meets in early November (2022-Q4), followed by a half point rate hike in December (2022-Q4). In 2023, investors are expected at least a quarter point rate hike in February (2023-Q1) and another in June (2023-Q2), bringing the FFR to a target range of 4.75-5.00%. After this peak in 2023-Q2, the FedWatch tool indicates the Fed will respond to developing recessionary conditions with quarter point rate cuts projected in July (2023-Q3) and December (2023-Q4).

Meanwhile, the Atlanta Fed's GDPNow tool's projection for real GDP growth in the soon-to-end quarter of 2022-Q3 dropped again for the third consecutive week, from 0.5% to 0.3%. The Bureau of Economic Analysis will provide its first official estimate of real GDP growth in 2022-Q3 at the end of October 2022. The BEA has previously indicated the first two quarters of 2022 experienced negative real growth, but that may change as the BEA's analysts release their annual revisions.

The S&P 500 Retreats Toward Bear Territory

Extraordinary things are afoot for the S&P 500 (Index: SPX). After recovering from the Eurozone geopolitics noise event last week, the index plunged on 13 September 2022 as investors reacted to the news that inflation in the U.S. is running much hotter than expected. By the end of the trading week, the S&P 500 retreated to 3,873.33, some 19.2% below its 3 January 2022 all-time record high and just 0.8% away from the 20% decline threshold that defines a bear market.

Investors reacted that way because the high inflation means the Federal Reserve will keep hiking rates until a hard landing in the form of a recession is inevitable. The CME Group's FedWatch Tool projects a three-quarter point rate hike next week (2022-Q3), which investors are now betting will be followed by another three-quarter point hike in November (2022-Q4). The tool then projects the pace of rate hikes may slow a bit, with a quarter-point rate hike in December (2022-Q4) to close out 2022 in the target range of 4.00-4.25%. In 2023, the FedWatch tool anticipates quarter-point rate hikes in both February and March (2023-Q1) to reach a target range of 4.50-4.75% before potentially reversing in either May or June (2023-Q2) in response to building recessionary conditions.

The latest update to the alternative futures chart captures the plunge in stock prices, which have fallen below the levels associated with the dividend futures-based model's projected trajectories associated with how far investors are looking into the future and their expectations for dividend growth at those times.

Alternative Futures - S&P 500 - 2022Q3 - Standard Model (m=-2.5 from 16 June 2021) - Snapshot on 16 Sep 2022

As this is being written, it's still too early to make a firm determination, but here are the possibilities for what that development means:

  1. The market is experiencing a new noise event. If so, the deviation from the model's projections will be temporary, as it was for the Eurozone Geopolitical Noise event that ended the previous week, and we'll see stock prices rebound up to the levels projected by the model after the noise dissipates.
  2. The market is experiencing a regime change. For the dividend futures-based model, that means investors are resetting how they value changes in the growth rate of dividends with respect to how they relate to changes in the growth rate of stock prices. In the model, that relationship is often stable and can be nearly constant for prolonged periods of time. But it does change and when it does, it shows up as a change in the value of the model's basic multiplier (m).

The early evidence is supporting the second option, if we also assume investors shifted their forward-looking focus toward 2023-Q2 in setting current day stock prices, which is to say the inflation report prompted another Lévy flight event this year. If so, the value of m changed from the -2.5 it has been since 16 June 2021 to instead be around +2.0 as of 13 September 2022. The next chart shows how the model's projections would change under that scenario:

Alternative Futures - S&P 500 - 2022Q3 - Standard Model (m=+2.0 from 13 September 2021) - Snapshot on 16 Sep 2022

The week's market-moving headlines and the FedWatch tool's projections provide evidence in support of such a new Lévy flight event, in which investors would be looking out to 2023-Q2 as the likely timing in which the Fed's current series of rate hikes reach their terminal peak before the Fed is forced to reverse and begin cutting rates because of building recessionary pressures. It may however be some weeks before we have a clear answer as to which scenario we've described applies or if something else altogether is at work. Unofficially, we're hoping the scenario we described is wrong and the first scenario is the right one.

But that's all part of what makes tracking the S&P 500 such chaotic fun! Here's the past week's market moving headlines:

Monday, 12 September 2022
Tuesday, 13 September 2022
Wednesday, 14 September 2022
Thursday, 15 September 2022
Friday, 16 September 2022

The Atlanta Fed's GDPNow tool's forecast for real GDP growth in 2022-Q3 plunged for the second consecutive week, from 1.3% to 0.5%. The Bureau of Economic Analysis will provide its first official estimate of real GDP growth for the U.S. economy in 2022-Q3 on 27 October 2022.