You can't say you weren't warned. The erosion of expected future dividends through the projected future of 2020 has begun contributing to the increasing volatile roller coaster ride S&P 500 investors have found themselves on.

Although we've been attaching daily updates of the market's actions to our regular weekly S&P 500 chaos series' posts, we thought it might be a good time to fully review the S&P 500's latest Lévy flight event, which took place between 24 February and 9 March 2020, as investors fully shifted their forward-looking attention from 2020-Q4 inward to 2020-Q2. The following animation shows all the market's action over the last three weeks from Friday, 21 February 2020 through Friday, 13 March 2020.

The Lévy flight event is really associated with changes in the expected timing of rate cuts by the Federal Reserve, where investors went from expecting two quarter point rate cuts in 2020, one in 2020-Q3 and another in 2020-Q4, to where as of last Friday, they are expecting the Fed to slash interest rates on or by the conclusion of the Federal Open Market Committee's 18 March 2020 meeting to the zero bound, which is to say to a target range between 0% and 0.25%.

In between, there was an emergency rate cut of a half point on Tuesday, 3 March 2020, and as of yesterday, Sunday, 15 March 2020, the Fed has executed another emergency rate cut, this time to the zero bound.

Since that expectation had locked in as of Wednesday, 11 March 2020, which brings us to what happened on Thursday, 12 March 2020, when the bottom seemed to drop out of the S&P 500. This is where the erosion of future expected dividends caught up to the level of the S&P 500, causing it to prematurely plunge by nearly 10%, which is to say it moved to the level it descended earlier than the dividend futures-based model anticipated.

We think that's a contributing factor to why the S&P 500 rebounded so strongly on Friday, 13 March 2020 when President Trump announced the government would be turning to the private sector of the U.S. economy for assistance in combating the coronavirus pandemic.

And that's pretty much what happened during the crazy week that was for the S&P 500. Since the Fed has already acted to slash the Federal Funds Rate to the zero bound range, we'll dispense with updating our snapshots of the CME Group's FedWatch tool's indicated probabilities of expected changes in that interest rate, and instead animate how investor expectations for future S&P 500 dividends has changed over the last three weeks, matching the period covered in our animation of the S&P 500's roller coaster ride.

We'll also provide a more complete listing of previous week's market-moving news headlines than what we have in our daily updates:

Monday, 9 March 2020

• Oil prices plunge, hit by erupting Saudi-Russia oil price war
• Russia vs Saudi: How much pain can they take in oil price war?
• Bigger stimulus developing all over:
• France, Italy seek fiscal shock therapy to combat coronavirus
• Kuroda says BOJ will take appropriate action with eye on markets, virus impact
• Japan's economy shrinks faster than first estimated on growing virus, recession risks
• Australia plans $6.6 billion stimulus to combat virus impact: report
• New York Fed raises repo limits as demand for loans jumps
• Germany says to help companies hit by coronavirus
• EU Commission looks at doing whatever it takes to help economy against coronavirus
• IMF says governments should offer cash transfers, tax relief to ease coronavirus effects
• New York Fed Repo Totals $112.93 Billion
• NYFed Massively Ramps Up Repo Facility Liquidity Bailout
• Barriers to bigger stimulus in Europe:
• Unclear wither coronavirus has longer-term economic impact - Germany's Scholz
• Swiss government to virus-hit companies: don't expect helicopter money
• Coronavirus, then oil collapse erase $5 trillion from U.S. stocks
• U.S. bank shares slammed as virus, plunging oil amp up economic fears

Tuesday, 10 March 2020

• Oil jumps 8% on stimulus hopes, spending cuts by U.S. producers
• Saudi Arabia, Russia raise stakes in oil production standoff
• U.S. firms rush to batten down hatches from Russia-Saudi oil price war, coronavirus impact:
• Big Oil faces 'survival mode' payout strategies as prices dive
• North American oil companies slash spending to cope with $30/bbl crude
• United Airlines shores up liquidity, cuts costs to weather coronavirus
• Bigger stimulus developing in the U.S., Japan, Australia:
• Trump presses 'pathetic' Fed to cut rates more aggressively
• Trump's coronavirus stimulus is still evolving. Here's what it should include, experts say
• Japan announces $4 billion coronavirus package, not yet eyeing extra budget
• Japan PM says won't hesitate to do what's needed in coronavirus fight
• Japan's Abe pressures BOJ to ease ahead of next week's rate review
• BOJ may pledge to ramp up ETF buying next week, sources say
• Australian PM says stimulus package will be announced soon
• Bigger trouble developing in the Eurozone:
• Euro zone economy slowed in fourth-quarter, imports jump
• Deutsche Bank economist expects German economy to shrink in 2020
• Coronavirus to further dent Europe Inc's earnings in 2020
• ECB, EU minions continue spectating from sidelines:
• ECB's Lagarde to join EU leader call on coronavirus on Tuesday
• EU pledges fund to tackle virus crisis, but no fresh money
• Wall Street bounces back as stimulus hopes soothe recession fears

Wednesday, 11 March 2020

• Oil price war impacts as Russia, Saudi Arabia dig in:
• Oil slumps as stock markets sink, while Saudi, UAE plan to boost capacity
• U.S. crude output growth to slow, oil prices to slump
• Exclusive: Russia to OPEC: deeper oil cuts won't work
• Saudi Arabia asked state agencies to implement big budget cuts: sources
• Russia vs Saudi: How much pain can they take in oil price war?
• Marathon Oil cuts drilling activity, spending
• Bigger trouble developing as China's coronavirus epidemic becomes pandemic:
• WHO calls coronavirus a pandemic as Britain, Italy shore up defenses
• China's coronavirus-induced supply chain woes fan concerns of possible drug shortages
• China says downward pressure on trade, global economy rising due to coronavirus
• China's building work stalls in February, as virus keeps workers indoors
• Italy in coronavirus lockdown as deaths soar and economy fades
• Bigger stimulus developing in the U.S.
• Washington considers actions to bolster U.S. economy as coronavirus cases mount
• Pence says stimulus proposal includes payroll tax relief
• U.S. eyes direct deposit to workers, tax delays, airline aid to counteract coronavirus
• Bankers meet with Trump, say prepared to help economy
• House Democrats to announce coronavirus economic relief package: aide
• EU, ECB minions may be forced to finally step off the sidelines:
• Euro zone inflation gauge falls below 0.9% for first time, day before ECB meets
• ECB urges EU governments to spend in fight against coronavirus: sources
• Meanwhile, what are the Fed's minions up to these days?
• New York Fed increases repo support to keep markets running smoothly
• Fed faces headache, taps epidemiologists in hunt for policy clues
• S&P 500 falls 20% from record high, crossing bear market threshold
• U.S. Treasury yields fall as stocks sink on stimulus uncertainty
• Mnuchin says no need for intervention in markets due to coronavirus

Thursday, 12 March 2020

• Bigger trouble, stimulus developing from coronavirus pandemic crisis:
• Text: What President Donald Trump told Americans about coronavirus
• Trump suspends all travel from Europe to the United States to fight coronavirus
• Trump administration eyes 10% middle-class tax cut proposal
• Trump says payroll tax relief could run to year-end or be made permanent: source
• Fed provides massive liquidity injection to calm markets amid signs of stress
• New York Fed increases repo support to keep markets running smoothly
• Explainer: Fed may go into its crisis tool kit soon. What's in it?
• Fecklessness of EU, ECB minions comes home to roost:
• Instant View: ECB holds rates but ramps up stimulus to counter virus impact
• ECB ramps up stimulus for virus-hit Europe but keeps some powder dry
• ECB did not even discuss a rate cut on Thursday: sources
• Passing the buck: ECB's Lagarde calls for ambitious fiscal response to coronavirus
• Lagarde Warns European Economy Faces '2008-Style Crisis' Without 'Coordinated' Government Action
• France urges 'massive' EU fiscal stimulus to amplify ECB action
• World stocks plunge into bear market on U.S. travel curbs, ECB move
• European stocks record worst daily loss on record
• Oil falls 7% after Trump surprises with travel curbs
• Saudi Arabia floods globe to squeeze Russia's share of oil market: sources
• Dow plunges 10% amid coronavirus fears for its worst day since the 1987 market crash
• Need more gloom? Nobody wraps up a down day of trading better than ZeroHedge: Black Thursday: "One Giant Margin Call" Drags Dow Down 10%

Friday, 13 March 2020

• Trump declares U.S. emergency as coronavirus chaos spreads
• Explainer: Here's what Trump's declaration of coronavirus emergency means
• Bigger stimulus developing in the U.S.:
• Fed starts bond purchases under ramped up liquidity program
• Central banks flash the cash as market panic drives liquidity squeeze
• Exclusive: U.S. Fed, banks discuss possible leniency on liquidity threshold to aid lending - sources
• Fed's Rosengren says 'disruptive' steps needed to 'dent' coronavirus
• Good news, bigger stimulus developing in China:
• China's coronavirus epicenter reports just five cases; Beijing tombsweepers urged to stay back
• Over 95% of larger Chinese firms outside Hubei resume work: official
• China pumps $79 billion into economy with bank cash reserve cut
• ECB chief minion shoots self in foot, hits Italy:
• Italy furious at ECB's Lagarde 'not here to close spreads' comment
• Flashback from 2 July 2019: Lagarde to rely on political skill to overcome shortcomings at ECB
• ECB's Lagarde rows back from comment that sent Italian yields higher
• ECB on back foot as Lagarde bungles virus message
• Why an off-the-cuff Lagarde comment spooked euro bond investors so much
• Lagarde is the best person for ECB job - de Cos
• Bigger trouble, confusion developing in Eurozone:
• EU, euro zone very likely in recession this year due to virus, Commission says
• EU to redirect funds to virus-hit parts of economy
• Merkel says coronavirus situation more extraordinary than banking crisis
• Germany to provide aid to artists, event firms hit by coronavirus
• German bankruptcies set to rise for first time since 2009 - administrator
• Germany would like to localize supply chains, nationalization possible, minister says
• Germany: No need to take stakes in key companies due to coronavirus at moment
• Crude posts worst week in a decade, hit by coronavirus and price war eruption
• Saudi Arabia floods markets with $25 oil as Russia fight escalates
• Russia sees no grounds to resume talks with OPEC+ - Interfax cites energy minister
• Stocks stage furious rally late after national emergency declared

Over at the Big Picture, Barry Ritholtz listed the positives and negatives he found in the past week's economics and market-related news.

While the S&P 500's volatility remains elevated, we'll attach daily updates of the market's main actions after the end of each trading day until it somewhat settles down. If you're accessing this article on a site the republishes our RSS news feed, you can get the latest updates by clicking through to the original article on our site. The best time to check will be late in the evenings, but since we don't follow a set schedule in posting updates, you might more reliably find our updates early the next morning.

Inside The Second Biggest Ever Percentage Loss For The S&P 500

Update 16 March 2020, 10:30 PM Eastern: The S&P 500 dropped 11.98%, the second biggest daily decline ever recorded by the index since Standard & Poor expanded its existing S&P 90 index to include the 500 largest publicly-traded U.S. firms back in 1957. Today's decline to an index value of 2,386.13 ranks only behind the infamous Black Monday Crash of 1987, which saw the value of the S&P 500 drop by 20.47% in a single day. Here's what the new drop looks like on the alternative futures forecast chart for the index:

We can dispense with presenting updates to the CME Group's FedWatch Tool's probabilities for future changes in the Federal Funds Rate and S&P 500 quarterly dividend futures in this update. With the Fed having slashed rates to a target range of 0%-0.25% yesterday, the CME Group's analysts will need to rework the tool to accommodate the possibility of negative rate cuts. At the same time, there was no change from Friday, 13 March 2020 for the S&P 500's quarterly dividend futures, so there's simply no update to present on that count!

Before we go further in analyzing the day's events, let's establish a definition for what stock prices are. In a well-established market where investors are largely free to voluntarily engage in transactions within it, stock prices represent the approximate present value of the dividends that investors reasonably expect to be sustained at specific points of time in the future.

In setting current day stock prices, let's say that investors start with the assumption that the future will be like the past, which makes the current day's stock price the starting point from which changes in future expectations, and thus stock prices themselves, will be adjusted with respect to. Once that starting point has been established, the rest of how stock prices behave turns out to be a relatively simple problem in what could be described as quantum kinematics. It's complex, but this approach makes it relatively easy to project where stock prices will go in the future if you can sort out how far forward in time investors are looking into the future in establishing their expectations as they set current day stock prices. According to the alternative futures chart, they still look to be focusing on 2020-Q2.

The reason we're bringing this definition up is because there's evidence that a major cause of the market's recent disruptive events is the failure of the Fed and other central banks to address a major portion of a developing liquidity crisis in the global economy, which is to say the market is having trouble with the "well-established" part of the definition. Specifically, when the Fed and other national central banks fired their emergency monetary policy bazookas on Sunday, 15 March 2020, we think they were aiming at the wrong liquidity problem, which is why the S&P 500 has prematurely collapsed to this level despite their action, at least according to the dividend futures-based model that helps explain why stock prices have been behaving as they have and has anticipated most of the volatility the S&P 500 has experienced.

What could the Fed do better? Right now, with major firms like Boeing, Kraft-Heinz and others looking to draw down as much cash as they can from their lines of credit as they respond to the coronavirus pandemic's impact on their businesses, we have the equivalent of a proverbial run on the bank, only it is huge corporations facing dismal outlooks engaged in the run. In their coordinated action, the Fed and other national central banks failed to provide liquidity support for the corporate paper (or debt) market, which is negatively impacting investor assessments of these firms' ability to pay dividends in the future.

That assessment lowers the projected future for stock prices regardless of how far forward in time you look, but more importantly, it is at the same time also lowering the starting point from which the potential future trajectories of stock prices are set. Like the coronavirus pandemic itself, it is the effect of a cascading failure, which is the result of an adverse feedback loop.

Much as the public is being tasked with engaging in quarantine practices to slow the spread of the COVID-19 pandemic, the Fed can stage an effective economic intervention and keep the big dominoes from falling by providing liquidity support to corporations, sufficient to ensure they can sustain their planned dividend payments more than a year into the future. Their focus should be on stopping the erosion that is taking place in the expectations for future dividends, which will provide the positive acceleration needed for stock prices to reverse their current crash trajectory. Done right, this action could lead investors to focus on a point of time further out into the future than 2020-Q2 which will help take much of the downward pressure off stock prices and allow the Fed to focus on other trouble areas.

It's not the only liquidity-related problem they need to address, but what we've described is an immediate action they can take that would produce positive visible results that would help restore a measure of their credibility. That's important because if people increasingly distrust those institutions, then the risk of a cascading failure grows, because the interventions that might otherwise be effective in arresting a series of failures after they have begun would be rendered impotent. If you know anyone at the Fed, please forward this suggestion to them.

The St. Patrick's Day Dividend Futures Massacre

Update 17 March 2020, 10:00 PM Eastern: The S&P 500 rebounded by 6% to a level of 2,529.19, thanks largely to the Fed initiating a short-term funding plan to support liquidity in the commercial paper market, plus news of a growing fiscal stimulus bill being advocated by the Trump administration on Capitol Hill. Here's what the latest update to the alternative futures chart looks like through the close of trading on St. Patrick's Day 2020:

The S&P 500 is no longer "early" in reaching its current level, because the projected trajectories of the dividend futures-based model has caught up to the level at which stock prices closed on 17 March 2020.

That is partly due to the sugar boost of the 6% rally in the S&P 500, but is mostly due to a collapse in the expectations for future dividends, which plunged on 17 March 2020.

We think both actions are attributable to what the Fed did with its liquidity support for the commercial paper market. Stock prices rose as anticipated on the news the Fed was going to reactivate its 2008-era CPFF liquidity support program for the commercial paper market, but dividend futures crashed because the amount of support the Fed can provide through this facility will fall far short of providing the magnitude of liquidity that a growing number of distressed companies desperate for cash will need to stay afloat without realizing massive reductions in their costs of operations, including large scale layoffs. Today's decline in expected future dividends is a harbinger for these other more severe outcomes for firms that will become completely starved for cash in the weeks and months ahead.

Credit Suisse's Zoltan Pozsar describes the commitment the Fed will need to make to avoid these outcomes.

The breakdown of o/n repo markets yesterday tell us that balance sheet is now getting scarce to conduct even the most basic type of market making.

As banks are pulling back from market making, the Fed and other central banks need to assume the role of dealer of last resort...

The Fed needs to become a buyer of CDs and CP, but not through the CPFF. The Fed needs to offer dollars on a daily frequency through the swap lines, and other central banks need to lend dollars on to both banks and non-banks.

The Fed needs to broaden access to the swap lines to other jurisdictions as dollar funding needs are large in Scandinavia, Southeast Asia, Australia and South America, not just in the G-7.

The dollar funding needs of both banks and non-banks is what’s at risk and the assets that are being funded are U.S. assets – Treasuries, MBS and credit – so the Fed has a vested interest.

The Fed still might come through, but doing so will mean doing far more than it has considered to date. The window of time they have to decisively act to forestall more disruptive events however is running out. We will soon be on the cusp of large numbers of dividend cut announcements, which will precede and coincide with other more severe outcomes as what is now a developing cascade failure propagates through the global economy. What kind of consequences do you suppose the Fed is willing to live with?

The Decline Resumes As Access To Cash Becomes Imperative

Update 18 March 2020 5:30 PM Eastern: Just over four weeks ago, on 19 February 2020, the S&P 500 reached a record high value of 3,386.15. Through the close of trading on 18 March 2020, it now stands at 2,398.10, having lost 988 points, or over 29% of its value. All of it attributable to events related to the global coronavirus pandemic, and the responses to it that are curtailing economic activities, and the damage that is doing to the industries that are very dependent on cash from revenues to keep their operations alive.

We've reached the point where we've had to re-draw our charts to accommodate much lower forecasts for stock prices and dividends. The alternative futures chart is first, where we find the level of the S&P 500 is most closely aligned with the trajectory corresponding to investors focusing on 2020-Q4 and the expectations for dividends associated with that quarter.

At this point, it's a very good thing that investors aren't yet looking at 2020-Q1. Speaking of which, in addition to adjusting the vertical scale of the dividend futures chart, we've also added 2020-Q1 to it in this latest update.

On 19 February 2020, investors were expecting the S&P 500's quarterly dividends in 2021-Q1 to be $15.65 per share. On 18 March 2020, that has fallen to $9.50 per share, a 40% decline. Restoring business' access to cash to sustain their operations will be key to stabilizing stock prices - there's still time, since most firms haven't slashed their dividends yet, but if the expectations for dividends in this quarter can be improved, say by a central bank providing sufficient cash liquidity to businesses, the action would put a floor in under stock prices.

Positive Developments Outweigh Negative For A Change

Update 19 March 2020, 9:30 PM Eastern: Positive developments outweighed the negative for the first time in days, as the S&P 500 closed up nearly a half percent to close the day at 2,409.39.

There were two big positive developments to outweigh the news of dividend cuts and impending layoffs for the day. First, the ECB's minions finally stepped off the sidelines and finally acted to begin providing liquidity to cash-starved Euro zone markets. Second, the Fed took a more serious step toward boosting the liquidity of U.S. money markets. In our view, both institutions will need to do much, much more, but what they did today took a good portion of downward pressure off stock prices, which isn't an insignificant result.

Investors responded to the news by shifting their attention back toward 2020-Q2, which thanks to the recent erosion of dividend futures in distant future quarters, represents a more desirable trajectory for the S&P 500 if their attention can be fixed there.

That shift in focus toward 2020-Q2 was a very positive development, because expectations for S&P 500 dividends per share in 2020-Q3 and 2020-Q4 have continued to deteriorate. Had investors focused on 2020-Q4, for example, stock prices would have continued their steep decline. The following chart updates the expectations for S&P 500 quarterly dividend futures:

On the whole, the dividend futures based model has done extraordinarily well in both anticipating and explaining the trajectory of stock prices during the coronavirus pandemic crisis. That's not surprising for us, since we developed the math behind it during late 2008 and early 2009, when the market experienced a similar magnitude disruptive event.

We'll recap Friday's market action on Monday, and continue appending daily updates to that post as we see what the never ending stream of new information brings in the next week.