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.
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
- Fed minions Jackson Hole conference becomes center of investor focus:
- Forecast for Powell's mountain resort trip: High inflation, limited visibility
- Fed to slow to 50 bps hike in September; recession worries grow: Reuters poll
- Inflation hitting hard in Mexico, United Kingdom:
- Mexico's inflation expected to hit 8.51% in first half of August: Reuters poll
- UK inflation to top 18% in early 2023, Citi warns
- Bigger trouble developing in the Eurozone:
- Bigger stimulus developing in China:
- China set to lower lending benchmarks Monday to revive wobbly economy
- Major Chinese banks urged to maintain stable loan growth, central bank says
- China steps up easing, cuts lending benchmarks to revive faltering economy
- BOJ minions see Japan's economy getting worse:
- BOJ seen cutting growth forecasts on soft spending, says ex-central bank executive
- As Japanese manufacturing fades, a factory town fights to stay alive
- Wall Street ends sharply lower on fears of aggressive Fed
- Tuesday, 23 August 2022
- Signs and portents for the U.S. economy:
- U.S. private sector activity contracts again in August, survey shows
- U.S. new home sales tumble to 6-1/2-year low; prices still high
- Fed minions putting bigger rate hikes on the table:
- Two Fed bank boards wanted 100-basis-point discount rate rise in July
- Fed's Kashkari says his biggest fear is inflation will be more persistent
- Bigger trouble developing in the Eurozone, United Kingdom:
- Euro zone business activity contracted again in Aug, outlook bleak
- UK factory output falls for first time since Feb 2021 - CBI
- ECB minions rethinking plan to hike rates:
- Wall Street ends down as investors eye slowing economy
- Wednesday, 24 August 2022
- Signs and portents for the U.S. economy:
- Brent oil climbs above $100 a barrel on potential OPEC cuts
- U.S. new vehicle prices to hit record high despite rising interest rates
- Fed minions get ready to party the only way central bankers can!
- Central bankers head to U.S. mountains with a bad case of inflation reflux
- Investors see no Fed pivot, brace for hawkish Powell message in Jackson Hole
- Bigger trouble, stimulus developing in China:
- China's jobless turn to car boot sales as COVID-hit economy stalls
- China to take more steps to support economy -state media cites cabinet
- Wall Street ends higher, with all eyes on Jackson Hole
- Thursday, 25 August 2022
- Signs and portents for the U.S. economy:
- Revision shows mild U.S. economic contraction in second quarter
- U.S. consumers borrow at record levels as car prices surge - Experian
- Fed minions described as having been wearing kid gloves, trying to shift focus to 2022-Q3:
- Fed officials: no call yet on 50 vs 75 bps rate hike next month
- Fed's Powell leaves kid gloves behind as he saddles up for Jackson Hole
- Fed's Bostic says he's split between 50 bps and 75 bps Sept rise - WSJ
- Fed's George: Too soon to predict size of Sept hike
- Fed's Bullard: Inflation likely to be more persistent than expected
- Fed's Harker: Would like to get rates above 3.4% and 'sit for a while'
- Fed's George: Too soon to predict size of Sept hike
- Bigger trouble developing in Eurozone:
- BOJ minions determined to keep unending stimulus alive:
- ECB minions thinking they may need to think more about inflation:
- Wall Street ends sharply up, fueled by Nvidia and Amazon
- Friday, 26 August 2022
- Signs and portents for the U.S. economy:
- Chief Fed minion Powell predicts pain in fight against inflation, other minions fall in line and promise shallow recession:
- Powell sees pain ahead as Fed sticks to the fast lane to beat inflation
- Fed's Bostic: leaning toward 50 bps hike in Sept -- CNBC
- Fed's Mester sees rates above 4%, says Powell speech 'strong' - BBG TV
- Fed's Harker: Any U.S. recession would be shallow
- Bigger stimulus developing in China:
- Bigger trouble developing in Japan:
- ECB minions thinking more about bigger rate hikes:
- Wall Street ends in a hole after Powell's Wyoming speech
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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Closing values for previous trading day.
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