S&P 500 De-levitates After Dimmed Prospects for Trade Deal, Gloomier Outlook for Eurozone

We’re one week out from the expiration of 2019-Q1′s dividend futures contracts, so we’re using the opportunity to take a snapshot in time of the S&P 500 (Index: SPX), where we find that the index has dropped back into the redzone forecast range of our spaghetti forecast chart following investor disappointment that the U.S. and China haven’t yet reached a trade deal, and the new information that the economic situation in the Eurozone has gotten gloomier.

The redzone forecast range on the chart is based on the assumption that investors would largely focus their attention on 2019-Q1 during February and March 2019. That assumption has mostly held up, but since that forecast incorporates dividend futures, whose contracts will expire on Friday, 15 March 2019, we will soon run out of 2019-Q1 for investors to focus upon. Given the relative level of the S&P 500 today, that means one of four things will happen in the next week:

1. Investors may shift their attention to 2019-Q2. If that happens, stock prices could rise 3-5%, since the quarter is projected to feature strong dividend growth.
2. Investors may shift their attention toward the more distant future of 2019-Q3 or 2019-Q4. The expectations for the change in the rate of dividend growth in both quarters are similar, but unfortunately, following 2019-Q2, that growth is projected to sharply decelerate, which is an expectation that has been in the cards (or rather, in the futures), since mid-2018. If investors focus their attention in these quarters, the S&P 500 can be expected to experience a correction, falling by 10% or more.
3. Investors might focus their attention to the even more distant future of 2020-Q1, in which we would still see the S&P 500 decline from its current levels, but more on the order of 3-5%.
4. As if the way stock prices work wasn’t already complex enough, the fourth option would be if investors split their attention between two different points of time in the future. In which case, we would expect to see stock prices fall in between the levels we described above, but would be weighted toward whichever future quarter has more strongly captured their attention.

As our chart is currently drawn, after the dividend futures contracts for 2019-Q1 run out, the redzone forecast range assumes that investors will shift their attention toward 2020-Q1 (Option 3). We’re going to leave the redzone forecast alone for the next couple of weeks, because it will provide a useful frame of reference even if that assumption proves to be wrong.

Remember statistician George Box’ immortal words: “Essentially, all models are wrong, but some are useful”! In this case, seeing how the trajectory of the S&P 500 changes with respect to it will give us information about how far into the future investors are focusing their attention that the context provided by market-moving news headlines will help confirm.

Speaking of which, here are the stories we noted during the first week of March 2019….

Monday, 4 March 2019

• Oil rises 1 percent on U.S.-China trade optimism, OPEC+ supply cuts
• Bigger trouble developing in China:

• China services growth eases to four-month low in further blow to economy: Caixin PMI
• Asian shares retreat as China targets slower growth

Bigger stimulus developing in China:

• China to slash taxes, boost lending to shore up slowing economy

• China to cut value-added tax rate for manufacturing, construction sectors
• China raises budget deficit to 2.8 percent of GDP: policy report

China’s defense budget rise to outpace economic growth target

Wall Street drops after weak data, healthcare slump

Tuesday, 5 March 2019

• Oil prices flat; focus on OPEC-led output cuts, Libya oilfield
• Bigger stimulus developing in China:

• China to take steps to boost domestic consumption this year: state planner
• China to slash taxes, boost lending to prop up slowing economy
• Factors that have propelled Chinese stocks to nine-month highs

Fed’s Kaplan says U.S. corporate debt a reason for rate hike pause

Fed’s Kashkari says wages show labor market still has slack

Wednesday, 6 March 2019

• Oil prices end mixed after U.S. crude stocks build sharply
• U.S. mortgage applications fall as loan costs rise
• Fed’s Williams says slower U.S. growth is a ‘new normal’
• Fed thinking about growing balance sheet again: K.C. Fed paper
• Wall Street sinks for third day as healthcare, energy slump

Thursday, 7 March 2019

• Oil edges up as tight global supplies offset economic concern
• Fed’s Brainard sees fewer U.S. rate hikes
• Bigger trouble developing in Eurozone:

• ECB cuts growth, inflation forecasts
• Surprise! ECB’s Draghi surprised colleagues with bold stimulus plans: sources
• ECB statement following policy meeting

Wall Street drops for fourth day as ECB stokes growth worries

We’re posting this edition of our S&P 500 chaos series ahead of our usual schedule, which means we’re missing linking Barry Ritholtz’ latest succinct summary of major market and economic events for the first week of March 2019. Look for it late Friday at this link. Meanwhile, the next edition of this weekly series should arrive on schedule, sometime early on Monday, 18 March 2019.