The Quiet Before the Storm for the S&P 500

After several weeks of volatility, the S&P 500 (Index: SPX) settled down during the second week of June 2019, as might be expected for when investors are focusing their forward-looking attention on the distant future quarter of 2020-Q1.

The reason they’re doing that is because they are currently betting on the Fed cut U.S. interest rates three times between now and the end of that quarter: a quarter point cut coming soon in 2019-Q3, possibly as early as July, with at least one an possibly another two quarter point rate cuts by the end of 2019-Q4. The following snapshot from the CME Group’s FedWatch Tool reveals these current expectations:

At this time, we think stock market investors are betting that third quarter point rate cut would more realistically happen in 2020-Q1 – if they anticipated that it was on tap for 2019-Q4, we would see stock prices decline sharply from their current level, similar to what happened in May 2019.

Speaking of which, if you’ve been following our S&P 500 chaos series over the past several weeks, you’ll be very familiar with all the shifts in how far investors are looking into the future that have driven the recent volatility in stock prices.

We’re just happy that it was a much quieter week with Fed officials having entered their communication blackout period ahead of the Federal Open Market Committee’s upcoming two-day meeting on 18-19 June 2019 – the quiet before the storm for investors, so to speak, where investors kept their focus on 2020-Q1 because there wasn’t any news to prompt them to shift their attention toward a different point of time in the future to continue driving more volatility into stock prices. Here are the headlines we picked out from the flow of news during the last week.

Monday, 10 June 2019

• Oil falls 1% amid U.S.-China trade dispute, uncertainty on supply cuts
• Bigger trouble developing in China:

• China exports grow despite U.S. tariffs, but import slump most in nearly three years

• China May copper imports fall 10.9% on prior month: customs
• China May crude oil imports drop from record in April
• China May soybean imports fall on trade war, pig disease (this time of year, this is bad news for Brazil)

Bigger stimulus developing in China all over:

• China to boost funding support for projects as economy slows
• ECB policymakers open to cut rates if growth weakens: sources

Wall Street rises on Mexico relief, Dow up a sixth day

Tuesday, 11 June 2019

• Oil falls on weaker oil demand growth, surprise rise in U.S. crude stocks
• Under pressure, Fed faces an outlook clouded by trade wars and signs of weakness
• Brazil’s economic recovery hinges on fiscal reforms, central banker says
• Bigger stimulus developing in China:

• China’s premier says will continue implementing tax, fee cuts: state TV
• China to boost funding support for projects as economy slows

Wednesday, 12 June 2019

• Oil tumbles on demand worries; stocks hit by trade, economic fears
• Bigger stimulus developing in China:

• China central bank to inject 35 billion yuan via OMO, resuming 28-day tenor: traders
• China bank loans rebound, more policy easing may be needed

Muted U.S. inflation strengthens case for Fed rate cut

Wall St. slips; banks fall with prospect of rate cut, energy drops

Thursday, 13 June 2019

• Oil surges on tanker attacks; stocks rise on Fed rate cut expectations

• UAE says attacks on oil tankers are a ‘dangerous escalation’
• U.S. blames Iran for tanker attacks in Gulf of Oman, Iran rejects assertion
• UK agrees Iran behind suspected tanker attacks in Gulf of Oman: BBC

Wall St. climbs as oil jumps after Gulf tanker attacks

Friday, 14 June 2019

• Oil rises but ends week lower on demand fears despite Mideast tensions
• Bigger stimulus developing in China all over:

• China’s May industrial output growth cools to 17-year low as trade war escalates
• Russian central bank lowers key rate to 7.5%, signals more cuts

Wall Street ends down; Broadcom warning hits chip stocks

• Broadcom’s $2 billion warning rattles global chip sector

But wait, there’s more! Barry Ritholtz counted 6 positives and 6 negatives in his review of the week’s major economic and market-related news.

Otherwise, sharp eyed readers will recognize that we’ve added some additional vertical bands to the right hand side of the S&P 500 alternative futures “spaghetti” forecast chart above, when compared to previous versions. Because the dividend futures-based model behind this chart uses historic stock prices from 13 months, 12 months and 1 month earlier as the base reference points from which it makes its projections into the future, these vertical bands indicate the periods where the echo of past volatility in stock prices will affect the accuracy of its projections of the future. This is a direct consequence of the volatility the S&P 500 began to experience during May 2019, where the upcoming echo will lead our model’s projections to undershoot the likely trajectory of the S&P 500, assuming investors remain focused on 2020-Q1.

With investors shifting their attention backwards and forwards in time frequently during the last month however, who knows how long that assumption might hold?