Unexpectedly Intriguing!
May 15, 2017

In Week 1 of May 2017, the probability that investors expecting the Federal Reserve to next hike U.S. short term interest rates before the end of 2017-Q2 reached 90%. As a result of that strong focus by investors upon the current quarter of 2017-Q2, the S&P 500 (Index: INX) has developed a real potential to experience the "ticking clock" problem.

The ticking clock problem for the S&P 500 arises whenever investors become strongly focused on the current quarter as they make the investing decisions that affect the value of the S&P 500 index. Because the clock on the current quarter is ticking down, investors only have a limited amount of time during which they can maintain their attention on the current quarter before they will be forced to shift their forward-looking attention to another point of time in the future.

The potential for a problem as a consequence of that shift in focus arises because of the expectations associated with the next period of time in the future to which investors might next collectively target their attention. If those expectations include an acceleration in the rate of growth of the index' dividends per share, then the shift in attention will drive an increase in stock prices, which would not be considered to be much of a problem.

If however those expectations include a deceleration (or negative acceleration) of the expected growth rate for the S&P 500's dividends per share, then the shift in attention will drive a decrease in stock prices. How much they might potentially move would then be a factor of the magnitude of the difference in those future expectations between the quarter they are currently focused upon and the quarter to which they set their attention to next.

Our dividend futures-based model for projecting the alternative future trajectories for the S&P 500 allows us to show how stock prices will likely be set as investors might focus their attention on specific points of time in the near future.

Alternative Futures - S&P 500 - 2017Q2 - Standard Model - Snapshot on 11 May 2017

If investors shift their attention to focus upon 2017-Q3, say because Fed officials begin communicating that they'll next hike interest rates in that quarter, that shift in attention will likely produce as much as an 8-10% decline in stock prices with respect to its projected trajectory. If investors fully redirect their focus to the 2017-Q4, then stock prices may rise by as much as 5%. And if investors have reason to split their focus between the two quarters, stock prices will fall somewhere in between, weighted to whichever future quarter investors are more strongly directing their attention toward.

As for telling how far forward investors may be looking, that takes paying attention to the market's news to understand the context of the market's information environment....

Monday, 8 May 2017
Tuesday, 9 May 2017
Wednesday, 10 May 2017
Thursday, 11 May 2017
Friday, 12 May 2017

Elsewhere, Barry Ritholtz tallies up the week's positive and negative economics news….

Two final notes before we close out Week 2 of May 2017 for the S&P 500:

  • Should investors redirect their attention to 2017-Q3, that shift in focus would represent why the "Sell in May" stock trading strategy might matter in 2017, even though we basically debunked the evidence to support the calendar effect as the result of statistical outliers last week! As we hinted in that post, it would be purely coincidental if it turns out to have any bearing this year!
  • More significantly, we've had a major change in our data source for the S&P 500's dividends expected to have been paid out during future quarters. The CBOE has discontinued publishing their Implied Forward Dividends (DVS) Indicators for the S&P 500 (DVMR, DVJN, DVST and DVDE), where as of 11 May 2017, our analysis is now based upon the CME Group's S&P 500 Quarterly Dividend Index Futures quotes in our analysis (accounting for the apparent changes in the projected alternative trajectories beginning on that date). Since these quotes represent actively-traded options, we anticipate somewhat more noisy volatility in their reported levels.

Labels: ,

About Political Calculations

Welcome to the blogosphere's toolchest! Here, unlike other blogs dedicated to analyzing current events, we create easy-to-use, simple tools to do the math related to them so you can get in on the action too! If you would like to learn more about these tools, or if you would like to contribute ideas to develop for this blog, please e-mail us at:

ironman at politicalcalculations.com

Thanks in advance!

Recent Posts

Applications

This year, we'll be experimenting with a number of apps to bring more of a current events focus to Political Calculations - we're test driving the app(s) below!

Most Popular Posts
Quick Index

Site Data

This site is primarily powered by:

This page is powered by Blogger. Isn't yours?

CSS Validation

Valid CSS!

RSS Site Feed

AddThis Feed Button

JavaScript

The tools on this site are built using JavaScript. If you would like to learn more, one of the best free resources on the web is available at W3Schools.com.

Other Cool Resources

Blog Roll

Market Links
Charities We Support
Recommended Reading
Recommended Viewing
Recently Shopped

Seeking Alpha Certified

Archives
Legal Disclaimer

Materials on this website are published by Political Calculations to provide visitors with free information and insights regarding the incentives created by the laws and policies described. However, this website is not designed for the purpose of providing legal, medical or financial advice to individuals. Visitors should not rely upon information on this website as a substitute for personal legal, medical or financial advice. While we make every effort to provide accurate website information, laws can change and inaccuracies happen despite our best efforts. If you have an individual problem, you should seek advice from a licensed professional in your state, i.e., by a competent authority with specialized knowledge who can apply it to the particular circumstances of your case.