The S&P 500 in Week 4 of April 2016

“As expected”, is the answer to the question “How did the S&P 500 behave during Week 4 of April 2016?”

But for that to be expected, you would have to have known the following:

1. Investors entered the week mainly focused on the distant future quarter of 2016-Q4.
2. The Fed, who had a two-day meeting that would end in the middle of the week, was unmotivated to surprise markets by changing the expectation for when it might next hike short term U.S. interest rates.
3. The expectations for the dividends of large market cap stocks announcing earnings during the week were highly unlikely to change.

Based on those three factors, the most likely outcome for the week would be that it would end as it began, with investors setting today’s stock prices in accordance with their expectations for the future quarter where they’ve fixed their attention: 2016-Q4.

And so it did:

For historical reference, here is what we identified as the week’s market moving headlines, or as was the case, the market’s non-moving headlines, along with our comments.

• 25 April 2016:

• Wall St. opens lower as earnings continue to underwhelm – and yet, though that trend continued throughout the entire week, stock prices really didn’t move all that much. It’s a good thing that earnings aren’t what really drive stock prices!
• New U.S. home sales drop on sharp decline in the West
• Wall St. slightly lower on energy drag, earnings

• Wall St. pares gains as 3M, P&G weigh; Fed eyed
• S&P ticks up buoyed by energy, materials

• Wall Street stocks steady, bond yields fall, oil hits 2016 high after Fed – the key words here are “Wall Street stocks steady” – the Fed didn’t do anything to meaningfully shift the forward-looking focus of investors, which is why stock prices didn’t move very much at all!
• Wall St. up after Fed fears ebb; Apple slumps

• Wall Street set to open lower after BOJ stuns markets – compare and contrast with the article’s original headline: “Futures sharply lower after BOJ holds steady on rates”
• Wall Street flounders on BOJ fears as Facebook, M&A boosts wane – compare and contrast with the article’s original headline: “Wall Street recovers as Facebook, M&A cushion BOJ shock”! In truth, neither of these factors caused a shift in focus for investors, nor did they change the expectations for U.S. investors for future dividends. As such, both events were simply noise that fully dissipated before the end of the trading day.

• Wall St. opens lower as investors assess earnings, data
• Markets may be underestimating how soon Fed will hike rates – Kaplan – of course, if investors were to suddenly come to expect that the Fed will hike interest rates on or before its June 2016 meeting, so they come to focus on the future associated with 2016-Q2 instead of the more distant future of 2016-Q4, the market’s negative response will likely compel the Fed to back off its plans….

On the whole, U.S. stock prices, as measured by the daily closing value of the S&P 500, behaved as expected during the fourth week of April 2016. With no compelling reason to shift their forward-looking focus away from 2016-Q4, nor any significant change in the expectations for future dividends, and absent any significant speculative noise that might cause stock prices to temporarily deviate away from the trajectory they are on, the week ended as it began. The S&P 500 is continuing to generally pace the trajectory associated with what we should expect if investors are focused on 2016-Q4.

And until one of those things changes, we can continue to expect very little volatility in the market through the end of the quarter, which would be mostly flat until June, after which we would seem to be set to see some fairly mild erosion in stock prices.

But then, that part of the future hasn’t locked in quite yet, so it will be subject to change!…