S&P 500 Retreats as Investors Shift Their Forward Time Horizon Inward

It didn’t take long for investors to put the S&P 500 (Index: SPX) through its first Lévy flight event of 2022.

After having just focused their attention on the distant future quarter of 2022-Q4 to drive the index to record highs to close 2021, the S&P 500 retreated in the first week of 2022 as investors absorbed the new expectation the Fed will be much more aggressive in tapering its stimulus bond buys and in ramping up rate hikes than they had previously believed. With 2022-Q1 now the anticipated timing of the Fed’s first rate hike, investors refocused their attention on the current quarter, sending the index to levels the dividend futures-based model indicated they would if they did focus on 2022-Q1.

The driving factor behind the shift in the time horizon for investors is the increased probility the Fed will initiate a quarter point rate hike by March 2022. The following snapshot of the CME Group’s FedWatch tool‘s probabilities of changes in the Federal Funds Rate reflects the new anticipation the Federal Reserve will need to be much more aggressive to rein in the inflation President Biden’s stimulus checks have fostered.

In this 7 January 2022 snapshot, the CME FedWatch Tool indicates quarter point hikes will be on tap after the Fed’s Federal Open Market Committee meets in March 2022, in June 2022 and in September 2022. After that point, the FedWatch Tool suggests a half point rate hike could follow in the fourth quarter of 2022, but there’s a lot of time between now and then for this potential future to change.

What will cause it to change is the random onset of new information, where we flagged the following headlines from the first trading week of 2022 for their market-moving potential:

Monday, 3 January 2022

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

• OPEC+ expected to stick with planned Feb output increase, sources say

Bigger trouble developing in Mexico:

• ‘Not a great year’ for Mexico’s factories, sector contracts for 22nd straight month
• Mexico inflation seen at highest level in two decades in December: Reuters poll

Positive signs developing in the Eurozone:

• Euro zone factory growth stayed strong in Dec as supply issues eased -PMI

Wall St rises on 1st trading day of 2022; Apple hits $3 trln market cap

• Apple Tops $3 Trillion Market Cap, Bigger Than Britain’s GDP

Tuesday, 4 January 2022

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

• Oil ends up at $80/bbl as OPEC+ sticks with Feb output hike
• Record quits, hiring slowdown may show Omicron’s impact on U.S. labor supply
• U.S. manufacturing cools but globally factories take Omicron risks in their stride for now

Most dovish Fed minion wants two rate hikes in 2022:

• Fed’s Kashkari, citing inflation risks, sees 2 rate hikes this year

• Fed’s Kashkari says not clear when supply side inflation factors will normalize

Dow posts closing record high for 2nd day, boosted by banks

• Nasdaq, S&P 500 fall with growth shares; banks boost Dow

Wednesday, 5 January 2022

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

• Oil rallies even as OPEC+ lifts output, U.S. fuel demand slips
• U.S. private payrolls surge in December; Omicron seen sapping momentum
• Fed funds futures see rate hike in March after minutes of policy meeting

Fed minions’ minutes point to faster drawdown of stimulus bond buys and rate hikes sooner:

• Hawkish Fed signals it may have to raise rates sooner to fight inflation

Bigger trouble developing in Japan at slower rate; Eurozone recovery stumbles:

• Japan’s car sales fall but at slower pace as supply constraints ease
• Euro zone economic recovery stumbled in Dec as Omicron spread -PMI

Bigger stimulus developing in China; bigger inflation developing in Japan:

• China’s central bank set to step up cash injection before Lunar New Year holiday – CSJ
• BOJ may revise up next fiscal year’s inflation forecast – sources

Wall Street closes sharply lower on ‘hawkish’ Fed minutes

Thursday, 6 January 2022

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

• U.S. factory orders increase strongly in November
• Oil extends rally on Kazakhstan unrest and Libyan outages

Fed minions talk up future rate hikes:

• The Fed is going to tighten, the only question is how fast

• Explainer-Fed signals readiness to shrink balance sheet. Why that’s a big deal

Fed’s Bullard says first interest rate hike could be in March

Fed’s Daly sees rate hikes ahead, but says ‘measured’ approach needed

Recovery signs in Eurozone:

• German industrial orders bounce back on strong foreign demand
• Hawkish Fed, German inflation push 10-year Bund yield up closer to 0%
• German inflation eases in December for the first time in six months

Wall Street closes sharply lower on ‘hawkish’ Fed minutes

• S&P 500 ends choppy session nearly flat, a day after sell-off

Friday, 7 January 2022

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

• U.S. employment growth misses expectations; unemployment rate falls to 3.9%

• Fed’s ‘maximum employment’ is here; not everyone has benefited

Oil slips, but gains 5% in the week on Kazakh, Libyan concerns

Fed minion wants to end stimulus bond buys faster, but to hike rates at slower pace:

• Fed’s Daly: reduce balance sheet sooner, go gradual on rate hikes

Mixed picture developing in the Eurozone:

• Omicron dents euro zone’s economic rebound; inflation at record high
• Euro zone retail sales growth surges past expectations in Nov

ECB minions see Eurozone’s highest inflation ever, say there will be less inflation in 2022:

• Euro zone inflation hits 5%, marking another record high
• ECB’s Lane says inflation to fall this year

Wall St posts declines for first week of 2022; Nasdaq has worst week since Feb

• Hawkish Fed gives value stocks a second wind

We don’t anticipate investors having much reason to shift their forward-looking focus back out to the more distant time horizon of 2022-Q4 until later this year. We anticipate investors will mainly focus on 2022-Q1 and/or 2022-Q2 for the next several months until enough certainty develops to allow investors to shift their attention toward the later quarters of the year.

But that’s an easy prediction. And it’s also more than enough time for the expectations associated with more distant points of time in the future to change. Which is to say the future may look much different later in the year.