S&P Nears Completion of Third Lévy Flight Event of 2019

It’s a sign of just how volatile the S&P 500 (Index: SPX) has become in recent weeks that we’re using the phrase “Lévy flight events” to describe the recent changes in the level of stock prices.

If you’re new to the kind of analysis we do, a Lévy flight is simply described a “type of random walk with clusters of short steps connected by rarer long steps” that describes how chaotic systems behave. We most often focus on the rarer long steps that stock prices take whenever they take “flight” and change value by a comparatively large amount during a short period of time, which our dividend futures-based model sees as investors shifting how far forward they are looking in time while making their current day investment decisions.

The S&P 500 didn’t disappoint during the first week of June 2019, where we find that the rebound the index has recorded is now nearly complete, with investors once again having shifted their forward-looking focus back out to 2020-Q1 in setting current day stock prices, after having fixed their attention on 2019-Q3/Q4 just a week earlier.

We believe the impetus for the shift in investor focus lies in the suddenly increased expectations for a third quarter point cut in the Federal Funds Rate by the U.S. Federal Reserve, which would follow two other quarter point reductions, one in 2019-Q3 and one in 2019-Q4, the expectations for which had been set in previous weeks. The following table from the CME Group’s FedWatch Tool outlines the probabilities that investors have implied for these potential rate reductions by betting on Federal Funds Rate futures as of the end of trading on Friday, 7 June 2019.

The reason why these expectations have evolved as they have is because of the new information that investors have absorbed over the past week, much of which points to slowing economies in much of the world. Here are the more prominent market moving headlines we extracted from the flow of news during the past week.

Monday, 3 June 2019

• Oil falls as trade worries mount, Saudi comments limit losses
• Global recession fears grow as factory activity shrinks
• Low inflation dogs Fed as it reviews policy framework

• U.S. Fed’s Daly says patient on rates, eyeing trade talks
• Fed’s Bullard: Trade, other risks, mean rate cut may be ‘warranted soon’

Nasdaq confirms correction as Facebook, Alphabet, Amazon drag

• Amazon, Facebook and Google stocks stumble as DOJ, FTC begin probing antitrust concerns
• Apple, Amazon, Google and Facebook shares tumble on antitrust concerns

Tuesday, 4 June 2019

• Oil bounces off four-month low, ends up 1% as stock markets rally

• Why oil was at a four-month low: Global energy prices pummeled by economic slowdown forecasts

Big dog speaks: Powell: Fed will act ‘as appropriate’ in face of trade, other risks

• Instant View – Fed will respond ‘as appropriate’ to risks like trade war: Powell

Little dogs yap:

• Evans says Fed is not getting in the way of a strong U.S. economy: CNBC
• Clarida says Fed cannot be ‘handcuffed’ to U.S. market prices

Big dog wins: Wall Street soars on U.S. rate cut hopes

Wednesday, 5 June 2019

• Oil slumps on U.S. crude stock build, WTI touches January low
• Global recession fears grow as factory activity shrinks
• Bigger trouble developing in China: China to encourage more private firms to do debt-to-equity swaps
• Fed policymakers promise response if U.S. economy slows

• Fed’s testing of new ideas for policy framework already underway
• Fed’s Kaplan says risks to downside have risen due to recent trade tensions: Bloomberg
• Chicago Fed’s Evans: ‘contained’ 2.5% inflation would not violate objective: Bloomberg

Wall St. climbs as weak private jobs data boost rate cut hopes

Thursday, 6 June 2019

• Oil jumps 2% as possible delay of U.S. tariffs on Mexico boosts equities
• Bigger trouble developing in China all over:

• China’s exports, imports seen shrinking in May as U.S. tariffs bite: Reuters poll
• India’s central bank cuts rates, turns ‘accommodative’ as economy slows
• ECB rules out rate hike, opens the door to more stimulus

Bigger stimulus developing in China:

• China May bank lending seen up, more stimulus expected as trade war risks rise: Reuters poll
• China central bank steps up liquidity support for more banks after Baoshang takeover
• China’s ‘mini-Lehman’ moment to spur smaller bank consolidation

Fed’s minions speak out:

• Kaplan: Too soon to judge if trade tensions require a rate cut
• Fed’s Williams says excessively low inflation a pressing problem
• Fed’s Williams sees headwinds from tariffs, open mind on rates

U.S. 30-year mortgage rates fall to lowest since 2017: Freddie Mac

Friday, 7 June 2019

• Oil rises nearly 3% as Saudi signals OPEC deal extension, stocks rally
• World bonds wave recession flags as future inflation evaporates

• Chile central bank surprises with rate cut, braces for sharper slowdown

Weak U.S. employment report raises red flag on economy

• Traders bet U.S. hiring slowdown will speed Fed rate cuts

Wall St. rallies on hopes of U.S. rate cut, trade progress

• After the bell: Trump suspends tariffs on Mexico after deal on immigration reached

Beyond these headlines, Barry Ritholtz tallied 7 positives and 7 negatives in his survey of the week’s major economic and market-related news.

With investors focusing once more on the distant future quarter of 2020-Q1, the next question is “for how long might that last?” Whether the S&P 500 embarks on a new flight or settles in for a lower level of volatility as part of its quantum random walk will hinge on the answer.