Unexpectedly Intriguing!
29 August 2022

Fed Chair Jerome Powell spoke from the Federal Reserve's annual retreat Jackson Hole on Friday, 26 August 2022. In doing that, he succeeded in sending the S&P 500 (Index: SPX) on its tenth confirmed Lévy flight event of 2022, sending the index down 3.37% to close the week at 4,057.66.

Since it's the tenth Lévy flight event of the year, investors are getting a lot of exposure these high volalilty episodes. For readers who are new to the concept, here's what it means:

  • Lévy flights involve large changes in stock prices that occur more often than statistical analysis based on a normal distribution predicts.
  • These events coincide with investors shifting their forward-looking focus from one point of time in the future to another.
  • How much stock prices change during these events is tied to what the expectations are for dividend growth between these future points in time.

All of which are tied together in the dividend futures-based model we invented to forecast the future for the S&P 500. The alternative futures chart tracks the actual trajectory of the index against the levels it projects it would be for when investors focus their attention upon specific future quarters.

Alternative Futures - S&P 500 - 2022Q3 - Standard Model (m=-2.5 from 16 June 2021) - Snapshot on 26 Aug 2022

Going into the last trading week, the chart shows investors had been focused on the future quarter of 2023-Q1 in setting current day stock prices. Fed Chair Powell's Jackson Hole speech on Friday, 26 August 2022 however refocused their attention on 2022-Q3 by increasing the uncertainty they have for how much the Fed will change interest rates at its upcoming September meetings.

Our summary of the market-moving headlines of the trading week that was documents how that shift in the forward looking focus developed during the trading week.

Monday, 22 August 2022
Tuesday, 23 August 2022
Wednesday, 24 August 2022
Thursday, 25 August 2022
Friday, 26 August 2022

After Fed Chair Jerome Powell got done speaking on Friday, 26 August 2022, the CME Group's FedWatch Tool's projections of the Fed's future interest rate hikes registered big changes in investor expectations, confirming the Lévy flight event resulting from investors resetting their time horizon. Instead of a half point rate hike in September (2022-Q3), the probability of a three-quarter point hike rose over 50% as investors expectations changed for this quarter. Looking further forward in time, that hike would be followed by a half point rate hike in November (2022-Q4), after which, investors think the Fed will hold off on more rate hikes until February 2023 when they anticipate a quarter point rate hike. That will put the Fed's target for the Federal Funds Rate in the 3.75-4.00% range, which is where investors are now expecting the Fed's series of rate hikes will top out.

Meanwhile, the Atlanta Fed's GDPNow tool's forecast for real GDP growth in 2022-Q3 held steady at 1.6%, so we can rule out changes in the outlook for the U.S. economy as a significant contributing factor to what happened with stock prices during the week. What happened was caused by investors drawing in their focus from 2023-Q1 to 2022-Q3 in reaction to Powell's Jackson Hole remarks.

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