From time to time, the S&P 500 (Index: SPX) experiences Lévy flight events. These are periods where stock prices move by a much larger-than-typical amount, which coincide with changes in the forward time horizon of investors.
The stock market's first Lévy flight event of 2021 took place during the third week of January. Here, Netflix' (NASDAQ: NFLX) announcement they would no longer need to borrow to finance the cost of new programming prompted investors to shift their forward-looking focus outward, from 2021-Q2 to the distant future quarter of 2021-Q4. That kind of change constitutes a Lévy flight event for the stock market, which directly coincides with larger-than-typical changes in stock prices.
The final week of January 2021 saw that process play out in reverse, as investors shifted their forward-looking focus back to the nearer term future quarter of 2020-Q2 in the second Lévy flight event of the year. The latest update to the alternate futures chart shows these changes against the backdrop of the various levels dividend futures-based model projects the S&P 500 would be based upon how far into the future investors are fixing their attention in making current day investment decisions.
As Lévy flight events go, the recent volatility in stock prices caused by these shifts of investor time horizons has been relatively muted. While crossing the threshold of being "interesting", which we define as the S&P 500 changing in value by two percent or more at the close of trading from the previous day's closing value, the expectations for changes in the growth rate of dividends per share at the future points of time investors have focused upon aren't very different from one another, which accounts for that muted performance.
On the other hand, if investors were to suddenly focus on 2021-Q1, we would see a much larger, downward move in stock prices from their current levels, which would be driven by new information. Speaking of which, here is our rundown of the new information to which investors reacted during the last week of January 2021.
- Monday, 25 January 2021
- Signs and portents for the U.S. economy:
- Oil rises 1% on U.S. stimulus hopes, supply concerns
- Biden says he is open to negotiating the proposed $1,400 COVID stimulus checks
- Fed minions excited to ignore inflation spike:
- Bigger trouble developing in the Eurozone, global insurers shrink COVID payouts,Pacific Island nations dependent on China for bailouts:
- German business morale hits six-month low as virus halts recovery
- One in five German businesses faces liquidity squeeze - survey
- Global life insurers impose restrictions, worried about long-term pandemic risks
- Pacific island nations turn to Beijing-backed AIIB as pandemic sinks economies
- BOJ minion says everything is rosy in Japan:
- ECB minions claim superior knowledge to markets and that Eurozone economic recovery has only been delayed by winter COVID surges:
- ECB can price climate risk better than the market, Panetta says
- ECB should think green when picking assets: policymakers
- ECB's Lagarde says economic recovery delayed not derailed
- Stimulus jitters dent Wall Street's early gains; Nasdaq hits record
- Tuesday, 26 January 2021
- Signs and portents for the U.S. economy:
- Oil prices slide as virus cases rise, demand worries persist
- Biden stimulus plan could boost U.S. output by 5% over three years: IMF
- Bigger trouble developing in China
- S&P, Nasdaq slip from record levels as earnings season gains speed (reuters.com)
- Wednesday, 27 January 2021
- Signs and portents for the U.S. economy:
- Oil prices end mixed, despite big U.S. crude stock drawdown
- Inflation expectations in U.S. Treasury TIPS ease from 'overdone' level
- Fed minions fighting crisis, no change in policies:
- Fed still in crisis-fighting mode as recovery appears to moderate
- Fed on hold as officials weigh pandemic against vaccines, fiscal support
- Bigger trouble developing in Eurozone, China, Japan:
- German government slashes GDP growth forecast as extended lockdown bites
- Column: China fails to learn from Trump backfire in trade war, is losing against Australia
- Japan's COVID crisis reawakens deflation fears as cash hoarding returns
- Stocks slump to worst day in three months in wake of Fed statement
- Thursday, 28 January 2021
- Signs and portents for the U.S. economy:
- COVID-19 savages U.S. economy, 2020 performance worst in 74 years
- Oil eases as demand worries offset weaker dollar, big storage draw
- New Home Sales increase to 842,000 Annual Rate in December; Sales up 18.8% in 2020
- Bigger bailouts developing in the Eurozone:
- Analysis: Missing rail link, underused port: EU's uphill battle to spend recovery billions
- Nine euro zone banks eat into capital buffers during pandemic: ECB
- Wall St. rebounds as earnings heat up, short worries cool
- Friday, 29 January 2021
- Daily signs and portents for the U.S. economy:
- Oil pares gains on worries about Coronavirus vaccine rollout
- U.S. consumer spending decreases further; inflation creeping up
- Fed minions downplay expectations for future U.S. economy performance:
- Fed's Daly sees sharp rebound, then slower slog back to pre-pandemic economy
- Fed's Kaplan: We are 'not anywhere close' to QE taper
- Better than expected economic data in Eurozone:
- France economy slumps less than expected in fourth quarter despite lockdown
- German unemployment falls unexpectedly in January
- Bigger trouble developing in Japan, China:
- Japan's factories extend output declines in December as recovery stalls
- Japan December household spending seen down on rising COVID-19 cases: Reuters poll
- China's January factory activity growth likely slowed as COVID cases rise: Reuters poll
- Wall St. drops after J&J vaccine data, GameStop effect weighs
Over at The Big Picture, Barry Ritholtz lists the week's positives and negatives he plucked from the economics and markets news streams!
In this edition of our S&P 500 chaos series, we haven't addressed the "David vs Goliath" story going on with the short squeeze of stocks like GameStop (NYSE: GME) and AMC Entertainment (NYSE: AMC). While fascinating in and of itself, the battle between retail investors and hedge funds has barely budged the bar for the S&P 500 index as a whole, which is our primary focus for this series.
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