The fifth week of June 2016 had another Lévy flight event for the S&P 500, following very quickly after the Brexit-driven event of Week 4, only now in the opposite direction from what we saw last week.
In the animated image below, we're showing the trajectory of the S&P 500 in the period from 7 April 2016 through 1 July 2016 with respect to the alternate levels our futures-based model would project for the index based upon the historic value of stock prices and the expectations for dividends in future quarters. If you're reading this article on a site that republishes our RSS news feed and the animation doesn't play, you may want to click through to our site to see the original animation or to YouTube where we've posted a video version. For it to play, regardless of where you view it, you will need to use a modern web browser with JavaScript enabled.
What you're seeing in the animation in the period from 23 June 2016 through 1 July 2016 is the result of investors shifting their forward-looking time horizon for their current day investing decisions, first from the distant future of 2017-Q1 back to the nearer term future of 2016-Q3 and then out again to the distant future of 2017-Q1. The actual trajectory of the S&P 500 adapted accordingly with respect to where the expectations for the change in the year-over-year growth rate of dividends at those different points of time would set them.
If the United Kingdom's referendum on whether to remain or exit from the European Union had a different outcome, it is highly unlikely that the S&P 500 would have followed the trajectory it did during this period. Following the Brexit vote, the increase in uncertainty with respect to the economic and financial impact of British voters to leave the E.U. is what prompted investors to draw in their forward-looking focus from the distant future, which is consistent with how investors behave during such disruptive events.
The response of the world's central banks, which was characterized by statements indicating greater easing of monetary policy, then succeeded in refocusing investors back out to the farther future during the week.
Speaking of which, here are the more significant headlines we flagged during Week 5 of June 2016, along with our contemporary notes.
- Monday, 27 June 2016
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- Wall Street sings Brexit blues with brutal two-day slide - Wow! Reuters actually thinks a decline of 5.3% in the S&P 500 over two days of trading is "brutal". Honestly - it was just a Lévy flight - one that will only last until investors shift their forward-looking focus back out to the more distant future. As such, we think it's a very short term buying opportunity.
- Tuesday, 28 June 2016
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- Wall Street bounces back after two-day Brexit rout - Okay, it looks like it could be shorter than we thought!
- Wednesday, 29 June 2016
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- Fed's Powell: U.S. financial conditions have tightened steadily since 2014 - this is old news.
- Fed's Powell: Brexit has shifted global risks to the downside - this is new news - Powell's communicating that the Fed's stance will be especially cautious going forward, which means the risk of short-term interest rate hikes has been reduced.
- Wall Street rebounds from Brexit with second day of big gains
- Thursday, 30 June 2016
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- Most big U.S. banks pass Fed's stress test, boosting shareholder payouts - This is one of the bigger stories of the week that didn't get a lot of attention due to the noise of other events. Basically, banks have been given a green light to boost their dividend payments to shareholders, which is one of the more positive developments for the U.S. stock market in 2016. Aside from the recovery in oil prices in the second quarter of the year, which have taken some of the pressure off the need of firms in that industry to cut their dividends, this is perhaps the best news U.S. markets could have at this point of time. The downside though is that we're also hearing of plans by the banks to engage in stock buybacks, which has a lot to do with boosting compensation for industry insiders and likely won't have much effect on all on share prices given how the execution of the buybacks will likely be targeted.
- Fed's Kaplan says Brexit to reduce growth: Bloomberg News
- Oil falls on profit taking after best quarter in seven years
- Fed's Bullard says sticking with idea of single rate hike - as a general rule, we're finding that St. Louis Fed president James Bullard's comments are perhaps the best weather vane for reading the direction that the Fed's policy is leaning.
- Wall Street rallies for third straight day as Brexit bruises fade - that short term buying opportunity is probably all but done.
- Friday, 1 July 2016
That's all for the S&P 500 in Week 5 of June 2016. As a heads up, we may be breaking news tomorrow, assuming that nobody else picks up on what looks like might be the biggest story of the previous week before we post it (so you can't say that we're not giving the mainstream financial media or even non-mainstream news sources a sporting chance - we would be happy to have them beat us to it!)
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Closing values for previous trading day.
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