Volatile Shifts in Forward-Looking Focus for S&P 500 Investors

Global financial markets experienced something of a “volatile shift” on Thursday, 23 May 2019, sending bond yields falling as the yield of the 10-Year Treasury dropped below the yield of the 3-Month Treasury as the inversion of the U.S. treasury yield curve suddenly expanded.

For the S&P 500 (Index: SPX), that shock prompted investors to once again draw in their focus from 2020-Q4 toward the nearer term futures of 2019-Q3 and Q4, where the prospects of a Federal Reserve rate cut in 2019 increased in response. The following chart from the CME Group’s FedWatch Tool shows are now betting on future rate cuts happening sooner rather than later, which is a change in their forward-looking expectations since last week.

Meanwhile, our spaghetti forecast chart shows the impact for the S&P 500, where we now find the level of the index falling about halfway between the levels the dividend futures-based model on which it based indicates would apply if investors were either focused exclusively on 2020-Q4, as they were as recently as the week before, or on 2019-Q3/Q4, for which our model forecasts nearly identical trajectories for the level of the S&P 500.

That brings up an interesting possibility. What if the dividend futures-based model we use in forecasting the alternative futures for the S&P 500 captured stock market investors reacting to the volatile shifts before bond market investors caught on to it? As you can see in the chart above, it shows the shift taking place as a growing deviation from the trajectory the model indicates the S&P 500 would have taken if investors had remained tightly focused on the future quarter of 2020-Q1 in setting stock prices beginning from a week beforehand, which could potentially explain why stock prices then didn’t fall by as much as the “violent treasury move” in the bond markets suggests they should have when that adjustment finally arrived.

That may be attributable to the higher-than-average level of new information feeding into the market during the trading week ending on Friday, 24 May 2019, where the last day of the trading week ahead of the U.S. Memorial Day holiday was the slowest news day for finding market moving headlines during the week that was.

Monday, 20 May 2019

• Oil touches multi-week highs as OPEC signals it may extend cuts
• U.S.-China trade negotiations:

• Trump says tariffs making companies leave China, a deal can’t be ’50-50′
• China rebuffs Trump claim U.S. tariffs are making firms leave
• U.S. unlikely to suffer big damages from China trade dispute: Fed

Fed’s Powell: U.S. inflation dynamics have shifted over the years

• Fed’s Powell: Business debt no subprime crisis, but still merits reflection
• Policymakers have changed views on how low unemployment can go: Fed’s Williams
• Atlanta Fed’s Bostic says not expecting imminent interest rate cut: CNBC

Wall St. slides as Huawei fallout hits tech shares

• Chips are down: Huawei U.S. blacklisting knocks semiconductor stocks

Tuesday, 21 May 2019

• Oil little changed as U.S.-Iran dispute supports, trade war weighs
• Fed’s minions speak out on inflation, business debt:

• Evans: Past inflation miss could be trouble for any new framework
• Fed’s Bostic: Business debt needs watching though not at ‘crisis’ level

Wall St. rises as Huawei reprieve boosts tech shares

Wednesday, 22 May 2019

• Oil plummets, on track for biggest weekly drop in 2019
• Fed’s minions speak out:

• In Fed policy review, labor may finally win out over inflation
• Fed may cut rates if inflation keeps disappointing: Bullard
• Fed’s Kaplan says U.S. rates are on the right setting: FOX
• Fed’s Kaplan says U.S. is ‘flirting’ with yield curve inversion
• Fed’s Williams says U.S. rates in the right place, inflation pressure nonexistent
• U.S. Fed may tweak key ‘reverse repo’ rate: minutes
• Fed’s no-rate hike stance fails to lift U.S. housing outlook: Reuters poll

Posturing in the U.S.-China trade war:

• U.S. decision on proposed tariff hikes is at least a month away: Treasury
• Explainer: China’s rare earth supplies could be vital bargaining chip in U.S. trade war
• China says U.S. needs to fix ‘wrong actions’ as Huawei ban rattles supply chains

Trade tensions slam Wall St. as global growth worries mount

Thursday, 23 May 2019

• Oil plummets, on track for biggest weekly drop in 2019
• Trump says Huawei dispute could be resolved in trade deal with China
• Fed’s minions speak out more:

• Fed’s Daly says tariffs could help get inflation to 2%: Fox Business Network
• Fed’s Kaplan says he’s ‘agnostic’ on next Fed rate move
• Fed officials get a warning about a possible approach to fight the next recession
• Fed’s patience on interest rates to last ‘for some time’

Trade tensions slam Wall St. as global growth worries mount

Friday, 24 May 2019

• Oil rises more than 1% but sets biggest weekly loss of 2019
• Mexican economy shrinks in first quarter, economists downgrade outlook
• Wall St. edges higher after Trump sparks U.S.-China trade hopes

That’s far from all the news affecting markets and the U.S. economy during the week. If you’re looking for a bigger picture than the items we highlighted, check out Barry Ritholtz’ listing of the week’s five positives and five negatives that he found among the week’s markets and economy-related news!