Bond Market Tantrum Driving Time Horizon Volatility for S&P 500

How far forward in time are investors looking in setting current day stock prices?

If you can answer that question, you’re well on your way to understanding why stock prices are behaving as they have been.

For example, the specter of rising interest rates has rattled the S&P 500 (Index: SPX) during the past two weeks. So much so that the bond market’s latest ‘tantrum’ greatly increased the prospects of the Federal Reserve taking action sooner rather than later to ensure the bond market has sufficient liquidity and to bring rates under greater control.

We see these dynamics in the time horizon for investors pulling inward to the current quarter of 2021-Q1 in the alternative futures chart’s latest update. That move comes after investors have generally fixed their attention on 2021-Q2 since late January 2021, with some brief glances at the more distant future quarter of 2021-Q4 in mid-February 2021.

Since expectations for the change in the year-over-year growth rate of dividends in 2021-Q1 are less than those for 2021-Q2, investors shifting their focus toward 2021-Q1 would coincide with falling stock prices. As the chart shows, the trajectory of the S&P 500 came close to breaking below the redzone forecast range shown on the alternative futures chart on Thursday, 4 March 2021, but rebounded to stay within it on Friday, 5 March 2021.

For now, that means the assumption built into the redzone forecast range that investors would maintain their forward looking focus on 2021-Q2 still holds. However, we’re getting a taste of the volatility that results from investors shifting their forward time horizon. That volatility would be a lot bigger if investors were to fully shift their attention to 2021-Q1, but the events of the past week were such they only shifted a portion of their attention to that possibility, and so, we just got a small taste of that potential.

Speaking of the events of the past week, here’s our list of the more notable items based on our assessment of their market-moving potential.

Monday, 1 March 2021

• Signs and portents for the U.S. economy:

• One year into pandemic, sky begins to clear over U.S. economy
• Oil down more than 1% on Chinese fuel demand doubts, OPEC supply concerns

• OPEC oil output drops in February as Saudi makes further cut: survey

U.S. factory activity scales three-year high, price pressures building

Senate to debate on COVID-19 bill this week after Democrats backpedal on minimum wage

Positive COVID recession recovery signs in Eurozone:

• Strong exports lift German factory activity to three-year high in February: PMI
• French factory activity grows faster in February: PMI

Bigger trouble developing in China:

• China’s factory activity growth slips to nine-month low: Caixin PMI
• China says domestic competition hurting rare earth prices

Bigger stimulus developing in Japan, France:

• Japan government officials debate fresh cash payouts to help the poor cope with pandemic: sources
• France steps up economic stimulus rollout with more cash for industry

Fed minions see problems, claim they are communicating clearly:

• Brainard says pandemic showed financial systems flaws, need for reform
• Barkin: Fed’s rate guidance is ‘explicit,’ investors should watch outcomes

Wall Street rallies on U.S. stimulus and vaccine hopes as bond markets calm

• S&P 500 surges in strongest one-day rise since June

Tuesday, 2 March 2021

• Signs and portents for the U.S. economy:

• Oil falls to two-week lows as OPEC+ seen easing supply curbs

Fed minions want higher inflation, low interest rates, to do nothing for a while:

• Fed’s Daly calls for ‘patience,’ says too-low inflation costly
• Fed’s Brainard: Closely watching bond market, would be concerned if financial conditions tighten
• Fed officials emphasize policy ‘patience’ as outlook improves

Bigger trouble developing in Eurozone:

• German retail sales tumble in January as lockdown bites
• German unemployment unexpectedly rises in February
• Spain’s jobless hit four million for first time in five years as pandemic curbs bite

Bigger stimulus developing in Japan, France:

• Japan government officials debate fresh cash payouts to help the poor cope with pandemic: sources
• France steps up economic stimulus rollout with more cash for industry

ECB minion has strong faith in ECB’s powers to keep yield curve under control:

• ECB has flexibility to counter undesired yield rise: de Guindos

Wall Street ends lower as Apple and Tesla retreat

Wednesday, 3 March 2021

• Signs and portents for the U.S. economy:

• U.S. mortgage rates jump by most in nearly a year: MBA
• U.S. service sector slows; businesses facing higher costs: ISM survey
• U.S. private payrolls rise modestly, worker shortages emerging
• Oil gains as U.S. fuel stocks drop, OPEC+ considers deal rollover
• Millions of U.S. households would not get COVID-19 payments under new Biden plan
• U.S. economy got off to modest start in 2021, Fed says

Fed minions want more equitable economy, want to keep exactly the same policies, and want to better measure economic health:

• Fed’s Harker said building a more equitable economy is important
• Fed’s Evans, ‘optimistic’ on recovery, sees no need to adjust QE
• Minneapolis Fed casts broader net to gauge state of U.S. economy

Bigger trouble developing in the Eurozone:

• Euro zone in double-dip recession but optimism abounded in February
• French business activity at three-month low in February: PMI

Positive coronavirus recession recovery signs in Australia:

• Australian economy storms ahead as COVID recovery turns ‘V-shaped’

Wall Street slides on tech sell-off, other world stocks flat

Thursday, 4 March 2021

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

• U.S. factory orders surge, but business spending on equipment slowing
• U.S. weekly jobless claims rise moderately as labor market stabilizes
• U.S. mortgage rates break above 3% for the first time since July – Freddie Mac
• Oil production could fall in Permian Basin due to Biden proposal – Dallas Fed report

Fed minion fails to address developing market concerns with rising rates:

• Fed’s Powell pledges patience, says easy policy appropriate

• Nasdaq ends sharply lower after Powell comments
• U.S. 10-year Treasuries borrowing rate in repo market goes negative, indicating stress

Bigger trouble developing in the Eurozone:

• German business decries gradual easing of coronavirus curbs as “disaster”

Wall Street slumps on Fed remarks, bond scare

Friday, 5 March 2021

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

• Oil hits almost 14-month high after OPEC+ extends output cuts
• U.S. job growth blows past expectations as recovery gets back on track

Fed minions do not fear rising Treasury yields:

• Tantrums come and go, but the Fed insists it will stay the course
• Fed officials say bond moves no reason to ease policy further

• Fed’s Bullard not particularly worried by rise in Treasury yields
• Kashkari: Treasury market moves show Fed’s new framework is working
• Bostic says Fed will support U.S. economy as long as necessary

U.S. 10-year note borrowing cost in repo market ends negative for fifth day

Bigger trouble developing in Japan, China, Eurozone:

• Japan’s household spending likely fell in January due to ‘state of emergency’ curbs: Reuters poll
• China sets ‘low bar’ for GDP growth, pledges more jobs
• China tells banks to scale back lending to contain financial bubble risks: sources
• Euro zone inflation spike seen short-lived, under ECB target for years: Reuters poll

Wall Street surges on jobs data, global equity markets regain ground

Elsewhere, The Big Picture’s Barry Ritholtz scans the past week’s markets and economics news and sets out the positives and negatives he found!

In his succinct summary, Barry observes the NASDAQ Composite stock index (Index: COMP) is now down for the year. The current bond market tantrum is hitting tech stocks much harder than others, which given its composition, means the Nasdaq has taken the most damage from the tantrum among the major U.S. stock market indices. The reason for that may be found in the hedging strategies of bond investors, who had been plowing money into 2020′s high-flying tech stocks to offset the risk of losses from rising rates in bonds during the coronavirus recession. With interest rates now rising, they are cashing in their profits in these stocks to offset their losses in bonds, as they sell tech stocks into a stock market that’s no longer propped up by their demand for tech stocks.

The S&P 500 has been affected by this activity because tech stocks have grown to claim a significant weighting within the index. It has been affected to a lesser extent than the Nasdaq because of its greater diversification.