Category Archives: SP 500

The S&P 500 Reacts to U.S. Inflation Surprise

The biggest market moving news of the week was the unexpected increase in reported inflation in the U.S. on Wednesday, 13 July 2022. Despite the shock, which was followed by related bad news for big banks pointing to developing weakness in the U.S. economy, the value of the S&P 500 (Index: SPX) reacted by mostly shrugging off the news, ending the week down less than one percent from where it closed the previous week.

The latest update to the dividend futures-based model's alternative futures chart helps explain why:

Alternative Futures - S&P 500 - 2022Q3 - Standard Model (m=-2.5 from 16 June 2021) - Snapshot on 15 Jul 2022

The chart shows that investors were tightly focused on 2022-Q3 throughout most the week and especially so from Wednesday through Thursday, which we see as the actual trajectory of the S&P 500 aligning with the center of the latest redzone forecast range. That makes sense because the Fed's next actions affecting short term interest rates in the U.S. will occur within this quarter. With Fed officials signaling those moves will involve larger than previously expected rate hikes to combat inflation, investors have had good reason to focus on this quarter.

But on Friday, 15 July 2022, stock prices unexpectedly jumped as it absorbed the bad news. We think that may be because investors began looking forward toward the end of 2022. That timing lines up with the new expected timing of the Fed's final rate hikes before the U.S. central bank may be forced to start cutting rates to respond to developing recessionary conditions in the first half of 2023.

We can't quite call it a new Lévy flight event just yet, because of the overlap in the dividend futures-based model's projected ranges for the S&P 500 for both 2022-Q3 and 2022-Q4. But now that we're at the end of the latest redzone forecast range, we have a relatively easy way to find out because of the relative levels of the model's projections based on investors focusing on either of these quarters.

If the level of the S&P 500 remains below the 4,000 threshold, that will be consistent with investors primarily maintaining their forward-looking focus on 2022-Q3. If the index rises above that threshold, that would be consistent with investors shifting their attention forward to 2022-Q4, which we would consider to be a new Lévy flight event.

There's a lot of moving pieces at play right now! Here's our recap of the past week's market moving headlines:

Monday, 11 July 2022
Tuesday, 12 July 2022
Wednesday, 13 July 2022
Thursday, 14 July 2022
Friday, 15 July 2022

After the week's higher than expected consumer inflation data, the CME Group's FedWatch Tool still projects a three-quarter point rate hike for July 2022 (2022-Q3), followed by another one in September (2022-Q3). After that the tool sees two quarter point rate hikes in 2022-Q4, with the Federal Funds Rate topping out between 3.50 and 3.75%. The tool anticipates a quarter point rate cut in June 2023 as the Fed responds to recessionary conditions investors currently expect to have fully developed by then.

Looking backwards, the Atlanta Fed's GDPNow tool's final projection for real GDP suggests the U.S. economy will have shrunk by 1.5% in the recently ended second quarter of 2022. That's down from last week's projection of -1.2% growth. The BEA will provide its first official estimate of 2022-Q2's GDP near the end of the month. The Atlanta Fed's GDPNow tool will start giving its estimates of real GDP for the current quarter of 2022-Q3 next week.

The S&P 500 Rises Out of Bear Territory Again

The S&P 500 (Index: SPX) tracked upward in the week ending 8 July 2022. The index closed the week at 3,899.38, putting it 18.7% below its all-time record high from 3 January 2022.

Stock price volatility was normal throughout the week, with the trajectory of the S&P 500 rising within the dividend futures-based model's projected trajectory associated with investors focusing on the current quarter of 2022-Q3:

Alternative Futures - S&P 500 - 2022Q3 - Standard Model (m=-2.5 from 16 June 2021) - Snapshot on 8 Jul 2022

The outlook for the index throughout 2022-Q3 has improved from what we first described several weeks ago, which still held as recently as last week. As you can see in the latest update to the alternative futures chart that now covers 2022-Q3, the level of the S&P 500 is within spitting distance of wher the model projects the trajectory of the index will go after we reach the end of the latest redzone forecast range.

Here's our summary of the market-moving news headlines from the Fourth of July holiday-shortend first trading week of the 2022-Q3 calendar quarter:

Tuesday, 5 July 2022
Wednesday, 6 July 2022
Thursday, 7 July 2022
Friday, 8 July 2022

The CME Group's FedWatch Tool now projects a three-quarter point rate hike for July 2022 (2022-Q3). That's followed by half point rate hikes in September (2022-Q3) and November (2022-Q4), then a quarter point rate hike in December (2022-Q4) to wrap up the year.

The Atlanta Fed's GDPNow tool now projects real GDP will shrink by just 1.2% for the just ended quarter of 2022-Q2, improving from the much more pessimistic -2.1% it indicated last week.

The S&P 500 Trends Downward To End 2022-Q2

The S&P 500 (Index: SPX) followed the trajectory associated with investors focusing on 2022-Q3 in the week ending the second quarter of 2022. Unfortunately for investors, that trajectory points downward, so the index ended the week much lower than it began and worse, ended up back in bear market territory.

Not that such an outcome is surprising in the current market environment. If you regularly follow our S&P 500 chaos series, you'll recall the following analysis:

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.

Those observations are from 21 June 2022, before any of what we described went on to happen, which is visualized in this chart.

Alternative Futures - S&P 500 - 2022Q2 - Standard Model (m=-2.5 from 16 June 2021) - Snapshot on 1 Jul 2022

Next week, we'll feature a first look at the dividend futures-based model's projections for 2022-Q3, which will begin with investors focusing upon this quarter.

Until then, here's our recap of the past week's market moving headlines, in which we find the growing potential for recession is commanding the attention of investors.

Monday, 27 June 2022
Tuesday, 28 June 2022
Wednesday, 29 June 2022
Thursday, 30 June 2022
Friday, 1 July 2022

The CME Group's FedWatch Tool is still projecting half point rate hikes for both July and September 2022 (2022-Q3) with quarter point rate hikes at six-week intervals after that through 2022-Q4 and 2023-Q1, topping out in a range between 3.50 and 3.75% in February 2023. After that, the tool now projects quarter point rate cuts in both March (2023-Q1) and May (2022-Q2), anticipating a recession requiring that action.

Speaking of which, the Atlanta Fed's GDPNow tool now projects real GDP will shrink by 2.1% for the just ended quarter of 2022-Q2, falling that much from last week's zero growth reading. U.S. Treasury Secretary Janet Yellen's "two quarters of negative growth as a good rule of thumb to indicate a recession" may have been met in the first half of 2022.

Future Dividend Watch at the End of 2022-Q2

What does the future hold for the dividends of the S&P 500 (Index: SPX)?

We're now in the gap between when the index' dividend futures contracts for 2022-Q2 have expired and the actual end of the calendar quarter, which makes it a good time to see what investors expect for the rest of the year. The good news is the outlook for the quarterly dividends per share of the S&P 500 has continued improving since we last checked them at the midpoint of 2022-Q2. Better yet, the futures data extends through 2023-Q2 so we can peer into the first half of 2023.

The following chart reveals those expectations as of Monday, 27 June 2022:

Past and Projected Quarterly Dividends Per Share Futures for S&P 500, 2021-Q2 Through 2023-Q1, Snapshot on 27 June 2022

Here's how the dividend futures have changed since our previous snapshot:

  • 2022-Q2: Up $0.07 per share.
  • 2022-Q3: Up $0.35 per share.
  • 2022-Q4: Up $0.50 per share.

These increases indicate an improved outlook for the S&P 500's dividends has developed over the last six weeks, which you would think would have boosted stock prices during this time. If you've been watching the stock market, you know they've fallen significantly instead and if you've been following our S&P 500 chaos series, you already know why the index has behaved as it has despite its improving outlook.

But this improving outlook may be in jeopardy. With recessionary risks now rising in the U.S., expectations for future dividends will take a greater role in shaping how stock prices behave. That's why we're increasing the cadence for presenting and analyzing future dividend data, which we'll now do at roughly six week intervals. Our next update will arrive in mid-August 2022 and will present the Summer 2022 snapshot of the future for S&P 500 dividends.

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.

2022’s Eighth Lévy Flight Event Pulls S&P 500 Out of Bear Territory

The trading week ending on Friday, 24 June 2022 ended with a bang for the S&P 500 (Index: SPX), which experienced its eighth Lévy flight event of the year. The index closed the week at 3,911.74, rising 3.06% just on Friday, 24 June 2022 alone and gaining 6.45% from the previous week's close. The index is now 18.4% below its 3 January 2022 record peak, rising back above the 20% decline threshold that defines a bear market.

If you're new to the concept of Lévy flights and how they apply to stock prices, here's a quick primer. They are perhaps most easily understood as the outsized changes in stock prices that occur more frequently than would be predicted assuming the day-to-day variation in stock prices is described by a normal distribution from conventional statistics. Their variation is better described by the math for Lévy stable distributions, which have "fatter tails" than what you'll see in the normal distribution's bell curve.

In the dividend futures-based model we use to project the potential future trajectories of stock prices, these events can be seen occurring whenever investors shift their forward-looking time focus from one point of time in the future to another. In past week, the alternative futures chart confirms investors fully shifted their forward time horizon to 2022-Q3 after having fully focused it on 2022-Q2 in the previous week.

Alternative Futures - S&P 500 - 2022Q2 - Standard Model (m=-2.5 from 16 June 2021) - Snapshot on 24 Jun 2022

Not that they had any choice. The expiration of 2022-Q2's dividend futures contracts on 17 June 2022 represented the clock running out on the future of 2022-Q2. Its end meant investors had no choice but to shift their focus to a different point of time in the future, where they've fixed it on 2022-Q3. Again. For now.

From our perspective, the first half of 2022 has proven to be an exciting time. That's because of the large difference between the potential trajectories of the S&P 500 for the alternative trajectories for 2022-Q2 and 2022-Q3, which are set by the expectations for changes in the rate of dividend growth for these two quarters. The cluster of volatility the stock market has experienced in the year to date has seen investors repeatedly shifting their forward-looking attention between these two quarters, producing an unusually high number of atypically large Lévy flight events in the process.

Those shifts have come as investors absorbed and responded to the random onset of new information throughout this period. We've tracked the market-moving news that has prompted those shifts throughout our S&P 500 chaos series during 2022. Here are the market-moving headlines we noted during the latest week that was.

Tuesday, 21 June 2022
Wednesday, 22 June 2022
Thursday, 23 June 2022
Friday, 24 June 2022

Data suggesting the U.S. economy is slowing more than expected is altering investor expectations for how the Federal Reserve will be setting interest rates to fight inflation. While the CME Group's FedWatch Tool still projects half point rate hikes for both July and September 2022 (2022-Q3), it now projects quarter point rate hikes at six-week intervals after that through 2022-Q4 and 2023-Q1, topping out in a range between 3.50 and 3.75% in February 2023. More remarkably, the FedWatch tool is now projecting a quarter point rate cut in June 2023 (2023-Q2), which is to say a response to a developing recession is now built into tool's projections.

The Atlanta Fed's GDPNow tool continued to forecast real GDP growth of 0.0% for the current quarter of 2022-Q2, unchanged from last week's running assessment. In remarks delivered on 21 June 2022, current U.S. Treasury Secretary and former Chair of the Federal Reserve Janet Yellen indicated she uses "two quarters of negative growth as a good rule of thumb to indicate a recession". Given the Atlanta Fed's GDPNow tool's projections, the U.S. economy may be on course to qualify as being in recession during the first two quarters of 2022 according to that rule of thumb. Not that there aren't some positive developments that may help forestall such an outcome, which we'll cover later this week.