Suppressed Fireworks for the S&P 500

The S&P 500 (Index: SPX) didn’t implode during the third week of September 2019, as the results of the drone and missile attacks on Saudi Arabia’s oil fields proved to be less disruptive to global oil supplies than initially feared. At the same time, the potential for an immediate escalation in the conflicts between Saudi and Iranian interests in the Middle East was avoided, which allowed oil prices to return to lower, but still elevated levels after spiking sharply upward on Monday, 16 September 2019 in the initial response to the attacks.

And then, there was the Fed. The Fed acted to cut short term interest rates in the U.S. by another quarter point on Wednesday, 18 September 2019, which prompted a negative spike in the U.S. stock market immediately after the announcement, which then quickly dissipated after top Fed officials hinted at the return of its quantitative easing programs in upcoming months.

So while there was more than one major fireworks show that could churn up stock prices during the week, the potential effect on the S&P 500 was largely suppressed. If it weren’t for Friday, 20 September 2019 being a quad witching day, marking the end of multiple futures contracts and raising the probability of volatility from the all the associated trading activity, the overall change in the S&P 500 would have been suppressed to be within a point of where it closed the previous week. With the quad witching day however, the S&P 500 still ended the third week of September 2019 just 15.32 points lower than it closed the previous week.

Consequently, investors maintained their focus on the distant future quarter of 2020-Q1 in setting stock prices throughout the week, where stock prices ended the week just about exactly where our dividend futures-based model would put them with that particular focal point:

Sharp-eyed, regular readers will also recognize that we’ve removed the tan-shaded areas we added shortly after the 31 July 2019 – 5 August 2019 Lévy flight event, which began after the Fed shook investor expectations for future interest rate cuts.

That’s because the model has continued to work well in anticipating future stock prices without adjustment, where the Fed’s meeting this week provided us with the opportunity we needed to confirm its calibration. The trajectory of stock prices during this past week has proven to be well within the range of values we would expect if investors were closely focused on 2020-Q1, so the model is performing well in the current environment, as the flow of new information helps explain why they have kept their attention on that future quarter.

Speaking of the flow of new information, here are the headlines we tagged during the week that was for their market-moving potential:

Monday, 16 September 2019

• Oil jumps nearly 15% in record trading after attack on Saudi facilities

• Explainer: How the Saudi attack affects global oil supply
• Evidence indicates Iranian arms used in Saudi attack, Riyadh says
• Iran’s Rouhani says Aramco attacks were a reciprocal response by Yemen
• Trump authorizes release of U.S. oil reserves if needed because of Saudi attacks

Bigger trouble developing in China:

• China’s slowdown deepens; industrial output growth falls to 17-1/2 year low
• ‘Very difficult’ for China’s economy to grow 6% or faster: Premier Li
• Bright spot? China’s property investment growth at four-month high in August

Wall Street drops after Saudi attacks, energy stocks spike

Tuesday, 17 September 2019

• Oil plummets 6% as Saudi minister says supplies fully restored

• Exclusive: Saudi oil output to return faster than first thought – sources

• Saudi Arabia to restore oil output fully by end of September: energy minister

U.S. believes attack on Saudi Arabia came from southwest Iran

• Trump says he does not want war after attack on Saudi oil facilities
• Trump does not see oil reserve release after Saudi attacks

Bigger trouble developing in China:

• China August factory deflation deepens, prices fall most in three years; pork prices soar
• China’s home price growth at weakest in nearly a year, developers seen cutting prices

U.S. manufacturing production rebounds, outlook remains weak

Trump says U.S. reaches trade deals with Japan, no vote needed

Fed rate cut a coin toss, futures imply

• Divided Fed set to cut interest rates this week, but then what?
• U.S. effective fed funds rate jumps on Monday: New York Fed data

Wall Street rises as oil fears recede, market awaits Fed

Wednesday, 18 September 2019

• Oil prices extend losses after Saudi pledge to restore lost output

• Saudi oil attacks came from southwest Iran, U.S. official says, raising tensions
• Trump says he has ordered substantial increase of Iran sanctions

U.S. fed funds rate breaks above Fed’s target range

• Explainer: The Fed has a repo problem. What’s that?
• Analyst view: Fed’s day two of cash injection into U.S. banking system
• Fed might end reserve run-off, ramp up bond purchases: analysts

Fed cuts interest rates, signals holding pattern for now

• Trump says the Fed should have acted faster but today’s action is fine

S&P 500 ends slightly higher after Fed gives mixed signals

Thursday, 19 September 2019

• Brent rises 1% as Saudi supply risks come into focus
• Bigger trouble developing in China all over:

• China’s growth could slip below 6%, analysts warn, as trade war takes toll
• ECB’s stimulus weapon has weak start
• OECD cuts growth outlook to post-crisis low

Trump adviser says U.S. president ready to escalate trade war if no deal agreed soon: SCMP

• Factbox: Tariffs in place or planned for nearly all goods traded by U.S. and China

Wall Street mixed as Microsoft climbs and Apple dips

Friday, 20 September 2019

• Oil slips on trade fears but soars in week after Saudi production attacked
• Fed in three voices: recession, bubbles, and ‘in a good place’

• Fed’s Bullard, explaining dissent, says U.S. manufacturing appears ‘in recession’
• Fed’s Rosengren says interest rate cuts are ‘not costless’

• Fed’s Rosengren: Will worry when consumers show worry
• Interesting sidebar: Fed’s Rosengren flags risks to economy in WeWork-style model

Fed’s Kaplan says he penciled in no further rate cuts in 2019

• Fed’s Kaplan says he supports modest, limited rate cuts

Fed’s Clarida hails strong U.S. consumer but says risks remain

Wall Street drops after China cancels trip to Montana farmland

Need a bigger picture on what happened in the third week of September 2019? Barry Ritholtz has you covered, providing a list of 6 positives and 6 negatives he found in the week’s economics and market-related news.

The easy question for the weeks ahead is: “what will happen to stock prices if investors shift their attention to another point of time in the future?” The answer to that is a simple problem in quantum kinematics. The big money question is: “how long will investors be compelled to hold their attention on 2020-Q1 before they shift it to a different point of time in the future?”

And regardless of how you might answer that question, how would you set up your investing strategy to take advantage of any such shift when it might develop into an opportunity?