The S&P 500 in the Middle of the Coronavirus Pandemic

In the previous edition of our S&P 500 chaos series, we reported investors had shifted their forward looking focus from 2020-Q4 outward to 2021-Q3, after news of an effective vaccine to combat the SARS-CoV-2 coronavirus pandemic broke.

Since then, news of more vaccines developed to prevent COVID-19 filled the news stream, and investors have remained focused on 2021-Q3. The latest update to our alternature futures chart visualizes that state of affairs through the close of trading on Friday, 20 November 2020.

Why would investors focus on 2021-Q3 in response to positive vaccine development news? Or rather, why wouldn’t they focus their attention on any other future point of time?

Investment manager Barry Ritholtz explains why investors would seeming pluck 2021-Q3 to focus upon out of thin air in his 20 November 2020 blog post “The Halfway Point“. Go read the whole thing, but here’s an excerpt that takes investors right up to the doorstep of 2021-Q3.

Here is a shocking observation:

The pandemic lockdown began in March of 2020. As of today, the two leading vaccine candidates from Pfizer and Moderna are requesting FDA approval for emergency use, then a fast track approval for distribution. These should become available in Q1, then be more widely distributed in Q2 and Q3. Best estimates for any form of herd immunity is later next year. Expectations are for life to begin to return to normal — meaning, going to back to work, mask-less social interactions, commuting, public events, etc. — are for sometime around June 2021.

From the March 2020 lockdown to a June 2021 re-opening is a 16-month span. The halfway mark? It’s today.

What we’re seeing in the alternative futures chart suggests investors are being a bit more cautious in anticipating the post-pandemic “reopening” beginning after June 2021, but otherwise, what Barry is describing is exactly how investor expectations have come to focus on a specific point of time in the future, which is directly affecting today’s stock prices.

That’s exactly what the dividend futures-based model we use to project the potential future trajectories the S&P 500 might take is designed to do, provided you know how far forward in time investors are focusing their attention in planning their current day investment decisions. And now, even though nothing in the news itself has specifically pointed to that future quarter, we now have a coherent explanation for why investors would suddenly fix their forward-looking attention upon the distant future quarter of 2021-Q3.

At least, until they have reason to shift their focus to another point of time in the future, or the expectations for dividends at that point of time significantly changes. Both of which is subject to the random onset of new information.

Speaking of which, here are the samples we pulled out of the news stream for the week that was, based on their market-moving potential.

Monday, 16 November 2020

• Daily signs and portents for the U.S. economy:

• Moderna says its vaccine is 94.5% effective in preventing COVID-19

• Factbox: Moderna’s mRNA coronavirus vaccine
• Moderna vaccine is second to exceed expectations; mutated virus may be more vulnerable to new vaccines

Oil settles higher boosted by latest COVID-19 vaccine progress

OPEC+ meeting ends with broad support for extension to oil cuts: sources

Fed minions focus on fighting racism, change in outlook with new vaccines:

• Fed’s Daly: need both impatience and patience to solve racial justice, other problems
• Faster recovery odds have risen with vaccine developments: Fed’s Clarida

Bigger trouble developing in the Eurozone:

• UK shopper numbers plunge as English lockdown makes impact
• German economy stagnating or shrinking amid second wave of virus: Bundesbank

ECB minions worry about exchange rates, hear demands for more aid:

• ECB’s De Cos says foreign exchange moves between U.S. Dollar and euro is worrying
• Euro zone needs more help from ECB and govts, policymakers say

Meanwhile, in Asia…

• China’s fourth-quarter economic growth will accelerate from third quarter: stats bureau

• China’s factory output beats forecasts as Asia shakes off COVID slump

Japan’s economy vaults back from COVID-induced recession, but outlook murky

Thai economy shrinks less than expected, outlook raised

S&P 500, Dow close at all-time highs on reignited vaccine hopes

• Tesla to join S&P 500, spark epic index fund trade
• Pfizer shares drop as Moderna vaccine seen easier to distribute

Tuesday, 17 November 2020

• Daily signs and portents for the U.S. economy:

• Oil edges lower after settlement as U.S. stockpiles build, pandemic lockdowns loom

• Exclusive: OPEC+ sees oil cut extension curbing 2021 rise in oil stocks, document shows

U.S. farmers celebrate soy price surge as Brazil misses out

U.S. retail sales lose speed as pandemic, lack of fiscal stimulus weigh

McConnell open to $500 billion for coronavirus relief

Fed minions step up bailout relief loans, disproportionate impact of coronavirus lockdown recession on blacks:

• Fed’s Powell signals emergency credit programs should be extended
• Fed’s Bostic: U.S. faces short-run problems, medium-term hopes on vaccine: CNBC

• Fed’s Bostic says recovery has been weakest for Black workers

Bigger trouble developing in Eurozone:

• Euro zone economy likely already in double-dip recession: Reuters poll

ECB minion doesn’t think COVID-19 vaccines will affect Eurozone economic outlook:

• Coronavirus vaccine no game changer for ECB forecasts, Lagarde says

China setting expectations for much slower growth:

• China will promote economic growth to a ‘reasonable’ range: Premier Li
• China should set around 5% GDP goal for 2021-2025: think tank economist

Wall Street closes lower as shutdown worries loom

Wednesday, 18 November 2020

• Daily signs and portents for the U.S. economy:

• Oil gains 1% on potential OPEC+ rethink and vaccine hopes
• U.S. import boom is delaying cargo at nation’s busiest port
• U.S. housing starts blow past expectations; COVID-19 poses risk

Fed minions go into wait and see mode:

• Rate cut bets melt as vaccines boost economy hopes
• Fed’s Barkin: ‘let’s see how it goes’ on whether more QE needed
• NY Fed’s Williams says rapid increase in virus infections could hurt economy

Deflation returns to Eurozone:

• Euro zone inflation confirmed negative in October on weak energy

Wall Street dives as shutdown worries overshadow vaccine hopes

• S&P 500 dividends seen dropping 1% in 2020

Thursday, 19 November 2020

• Daily signs and portents for the U.S. economy:

• Oil slips a second day as coronavirus cases spiral amid stimulus talks
• U.S. existing home sales rise for fifth straight month
• ‘Dial back’ or ‘emergency brake?’ New lockdowns and the U.S. economy
• Mnuchin pulls plug on some pandemic lending programs that Fed considers essential

• Instant View: Mnuchin asks Fed to return money for emergency lending

Fed minions want more government spending, upset at possibility it won’t happen:

• Fed’s Bostic: would be prudent to keep U.S. emergency lending programs open
• Fed’s Kaplan says economy could shrink as virus surges
• Fed’s Mester says lack of fiscal aid and rising infections concerning: Bloomberg TV

Bigger trouble developing in Eurozone:

• Germany’s partial lockdown is hitting skilled trades sector: ZDH

Bigger stimulus developing in China:

• China to cut tariffs, boost imports of high-quality goods and services: Xi

ECB minions claim ECB can never go bankrupt or run out of money, focus on climate risks:

• ECB can’t go bankrupt even it suffers losses
• ECB’s Weidmann calls on cenbanks to address climate-related financial risks: FT

Wall Street closes higher as new stimulus talks ease shutdown worries

Friday, 20 November 2020

• Daily signs and portents for the U.S. economy:

• Oil rises about 1%, posts third week of gains on vaccine hopes
• ‘Dial back’ or ‘emergency brake?’ New lockdowns and the U.S. economy

Fed to return unspent coronavirus relief funds to U.S. government:

• Fed’s Powell says will return Treasury funds as programs set to lapse
• Investors say Fed ‘backstops’ removed by Treasury were little used but lifted confidence
• Explainer: Fed lending programs – What did they accomplish? How hard would it be to bring them back?
• Treasury’s Fed funding clawback will not ‘hamstring’ new administration: official
• Senate leader McConnell seeks to ‘repurpose’ expiring Fed lending for coronavirus

Fed minions see growth ahead, but want more government spending, disappointed over losing slush fund it wasn’t using:

• Fed’s George sees virus, fiscal fade as risks to U.S. outlook

• Fed’s George sees recovery headwinds from energy sector

Fed’s Kaplan says U.S. economy needs more fiscal support

Fed’s Evans says end of pandemic relief ‘disappointing’

Bigger economic trouble developing in Eurozone:

• French, Italian economies hurt most under second lockdowns

ECB minions focus like lasers on climate policies instead:

• ECB has no mandate for direct role in climate change fight: Weidmann
• EU plans tight car CO2 limits under green finance rules
• ECB must incorporate climate change into policy approach: Villeroy

Wall Street closes lower as surging COVID-19 cases offset vaccine hopes

The Big Picture’s Barry Ritholtz also listed the positives and negatives he found in the past week’s economics and markets news. Barry’s weekly series is a good starting place for picking up additional context that percolates in the background beyond the headlines we feature for their market-moving potential.

On a final note, sharp-eyed readers will note that over the projected future of next two weeks, the alternative futures chart is showing a relatively short duration “echo” of the volatility that struck the market about a month ago. This is an artifact from the model’s use of historic stock prices in setting the base reference points from which it projects the future. For longer duration events, we will often add a redzone forecast range to account for the echo effect, but since this upcoming echo is comparatively short, we’ll simply note that the trajectory of the S&P 500 will likely appear to “run hot” with respect to the model’s projections over these weeks.