The S&P 500 (Index: SPX) reached new heights in the third week of June 2019 as the U.S. Federal Reserve's signaled it would soon begin slashing its Federal Funds Rate, lifted by the prospects the Fed may implement as many as four rate cuts happening between between the present and the end of the first quarter of 2020.

Although the odds of a Fed rate cut in 2020-Q1 dropped below 50% again on Friday, 21 June 2019, we think the potential for a fourth rate cut in March 2020 will continue to fix investors' attention on this distant future quarter, unless and until they might have a more compelling reason to reset their focus upon a different point of time in the future.

With that assumption in place, we've added a redzone forecast range to our alternative futures spaghetti forecast chart, where we would anticipate the S&P 500 to fall while investors set their focus on 2020-Q1 during the next several weeks while the echo of past volatility in stock prices affects the accuracy of our dividend futures-based model in projecting future stock prices.

And because we're so close to the end of 2019-Q2, which is already over where the quarter's dividend futures contracts are concerned, we'll take advantage of the opportunity to project the potential futures for the S&P 500 through the end 2019-Q3:

On the whole, the S&P 500 behaved predictably during the third week of June 2019. A big reason why that was the case was the flow of news during the week, where we flagged the following headlines as particularly newsworthy for their market-moving potential.

Monday, 17 June 2019

• Oil prices fall 1% as economic worries outweigh tanker tensions
• U.S. shale oil output to rise to record 8.52 million barrels per day in July: EIA
• Bigger stimulus developing in China all over:
• China urges big lenders not to shun small non-banks after Baoshang's woes: sources
• China renames, restructures state railway giant in reform push
• Signs China stimulus getting traction: China's home prices growth fastest in five months, raises policy challenge
• Australia's central bank says 'likely' will have to cut rates again
• Faith in the Fed nudges Wall Street higher
• Fed likely to resist pressure to cut U.S. rates this week

Tuesday, 18 June 2019

• Oil climbs over $1/bbl on U.S.-China trade deal hopes, Mideast tension
• Bigger stimulus developing in China in Eurozone:
• Major policy reversal: ECB will provide more stimulus if inflation doesn't pick up: Draghi
• Draghi's stimulus hints put ECB in Trump's crosshairs
• Wall Street nears record as mood on trade again turns optimistic
• U.S., China rekindle trade talks ahead of Trump-Xi G20 meeting

Wednesday, 19 June 2019

• Oil prices little changed despite U.S. crude stock draw
• Fed sees case building for interest rate cuts this year
• FOMC statement from June 18-19 meeting
• Instant view: Fed holds interest rates steady, sets up for cuts
• Traders bet heavy on Fed rate cuts ahead
• What changed for the Fed in seven weeks? Trade risks top the list
• Mexico first to ratify USMCA trade deal, Trump presses U.S. Congress to do same
• Stocks approach record as Fed soothes Wall Street's fears

Thursday, 20 June 2019

• US oil surges 5.4% to settle at $56.65 after Trump says Iran made a ‘very big mistake’
• Bigger stimulus developing all over:
  • Worried by US-China trade tensions, ECB considering new stimulus: Olli Rehn
  • Indonesia Signals Rate Cut Is Coming Aas It Eases Reserve Ratio
  • Australia : Australian shares hit 11-year peak on fresh rate cut hopes, NZ edges down
  • Bank of Japan joins Fed, ECB in signaling easing if needed, keeps policy on hold for now
• China, U.S. trade teams to hold talks
• Rate-cut euphoria elevates S&P 500 to record high

Friday, 21 June 2019

• Oil climbs on Iran tensions, stocks edge back from seven-week highs
• U.S. oil soars 10% in week on fears of U.S.-Iran conflict
• Bigger trouble developing in China:
• China Hit By "Significant Banking Stress" As SHIBOR Plummets To Recession Levels
• From Baoshang to trade wars to local government: Mapping China’s toxic debt
• Bigger stimulus developing in China all over:
• China overnight repo rate falls to 4-year low as PBOC tries to calm funding jitters
• Fed officials face weak inflation, but split over what it means
• Fed's Brainard says risks bolster argument for lower-than-expected rates
• Fed's Kashkari calls for 50 basis point cut in U.S. rates
• Clarida: Outlook is for continued U.S. expansion, but Fed prepared to act
• Fed's Bullard says he dissented at Fed meeting on concerns over weak inflation, growth
• Bang-up week on Wall Street ends with a whimper

At the Big Picture, Barry Ritholtz identified 6 positives and 6 negatives in his review of the week's major economic and market-related news.

The S&P 500 will enter 2019-Q3 relatively near the ceiling for how high it can go with the current expectations for future dividends, which puts it into something of a danger zone. While it has some room to move up from its current record level, events that might cause investors to refocus on the nearer term future would likely coincide with sharp declines in stock prices as 2019-Q3 offers investors heightened risks.

If you've ever had to deal with a pair of earphones after they've become tangled, you know exactly what kind of mess they can make and what kind of pain they can be to untangle. Is there anything you can do about it?

Before we go any further, let's draw some lessons from science for how cords can almost spontaneously become tangled from the following video:

Now, let's get to the practical matter of finding out how likely your cords will become tangled. In the following tool, we've adapted the math developed by Dorian M. Raymer and Douglas E. Smith in their 2007 paper to calculate the probability that your cord/string/rope will become tangled, assuming that it is made of a medium-stiffness material, based upon its length. If you're reading this article on a site that republishes our RSS news feed, click here to access a working version of this tool!

If your cord has a relatively low probability of becoming knotted or tangled, say below 5 or 10%, you might not need to worry much about taking any special measures to keep it that way.

But, if you want to avoid the hassles that come from your cords becoming tangled, you might consider the suggestions from the video, using shorter, stiffer cords (if feasible) or getting smaller containers to store your longer cords (if not).

Meanwhile, if you're looking to learn more about knot theory, and yes, there is such a thing in maths, here's a quick introduction:

References

Raymer, Dorian M. and Smith, Douglas E. Spontaneous knotting of an agitated string. PNAS. October 16, 2007 104 (42) 16432-16437; https://doi.org/10.1073/pnas.0611320104. Note: For our tool, we corrected the L₀ parameter to be 1.025 after replicating the other parts of the authors' logistic function regression using the data presented in Figure 2, where our L₀ correction allowed us to replicate their reported probabilities for various cord lengths.

The Federal Reserve chose to leave short term interest rates in the United States unchanged at the conclusion of its fourth two-day meeting of 2019 on 19 June 2019, holding its target range for the Federal Funds Rate between 2.25% and 2.50% for at least another six weeks, when the Fed will meet again to consider cutting the Federal Funds Rate.

According to the CME Group's FedWatch Tool, investors are betting the Fed will cut its Federal Funds Rate by a quarter point, giving a 100% probability of that happening at the next meeting. Following the Fed's June meeting, investors are now also betting the Fed will cut rates by another quarter point at the conclusion of its 18 September 2019 meeting, and again at the conclusion of its 11 December 2019 meeting, putting three rate cuts on tap for the remainder of 2019.

They are also giving a little higher than even-money odds that the Fed will cut rates again in March 2020, which would put the forward-looking focus of investors on that distant future quarter.

As for the odds of recession, there is now a one-in-eleven chance the U.S. economy will enter into a recession sometime between 19 June 2019 and 19 June 2020 (or really, before July 2020). The latest update to the Recession Probability Track shows these odds at roughly a 9% probability.

The Recession Probability Track is based on Jonathan Wright's 2006 paper describing a recession forecasting method using the level of the effective Federal Funds Rate and the spread between the yields of the 10-Year and 3-Month Constant Maturity U.S. Treasuries.

If you would like to run your own recession probability scenarios, please take advantage of our recession odds reckoning tool, which like our Recession Probability Track chart is based on Jonathan Wright's paper.

It's really easy. Plug in the most recent data available, or the data that would apply for a future scenario that you would like to consider, and compare the result you get in our tool with what we've shown in the most recent chart we've presented. We do just that, in fact, when we account the Fed's recent quantitative tightening monetary policies in our in-between Fed meeting updates, which would put the odds of an official period of recession starting before July 2020 much higher than what the "official" Wright methodology indicates.

If you would like to catch up on any of the analysis we've previously presented, here are all the links going back to when we restarted this series back in June 2017.

Previously on Political Calculations

• The Return of the Recession Probability Track
• U.S. Recession Probability Low After Fed's July 2017 Meeting
• U.S. Recession Probability Ticks Slightly Up After Fed Does Nothing
• Déjà Vu All Over Again for U.S. Recession Probability
• Recession Probability Ticks Slightly Up as Fed Hikes
• U.S. Recession Risk Minimal (January 2018)
• U.S. Recession Probability Risk Still Minimal
• U.S. Recession Odds Tick Slightly Upward, Remain Very Low
• The Fed Meets, Nothing Happens, Recession Risk Stays Minimal
• Fed Raises Rates, Recession Risk to Rise in Response
• 1 in 91 Chance of U.S. Recession Starting Before August 2019
• 1 in 63 Chance of U.S. Recession Starting Before September 2019
• 1 in 54 Chance of U.S. Recession Starting Before November 2019
• 1 in 42 Chance of U.S. Recession Starting Before December 2019
• 1 in 26 Chance of U.S. Recession Starting Before February 2020
• 1 in 16 Chance of U.S. Recession Starting Before April 2020
• 1 in 14 Chance of U.S. Recession Starting Before April 2020
• 1 in 13 Chance of U.S. Recession Starting Before May 2020
• 1 in 12 Chance of U.S. Recession Starting Before June 2020

There are two main sources we draw upon for peering into the future for dividends in the S&P 500 (Index: SPX). The first of these is a relative newcomer, the CME Group's S&P 500 Quarterly Dividend Index Futures Quotes, which indicates the projected amount of dividends expected to be paid out to investors from the current quarter out to the same quarter a year from now.

The second source we use is IndexArb's Dividend Analysis, which we've been tracking regularly since early 2009, although it has been around for much longer.

Both these sources are linked to dividend futures contracts, which for a given quarter, indicates the amount of dividends per share that will be paid out from the expiration of the dividend futures contract on the third Friday of the month ending the preceding quarter through the third Friday of the month ending the indicated quarter. By contrast, when Standard and Poor reports the dividends paid out to shareholders for its S&P 500 index for a given quarter, it reports the total amount paid out "per share" for the index for an entire calendar quarter.

That said, we're seeing some differences between the CME Group and Index for S&P 500 dividend futures, particular for the fourth quarter of 2019. The following chart shows what these sources are telling us to expect for dividends in each quarter of 2019, as of the dividend futures available on 18 June 2019:

It may not look like it from the 84-cents per share difference between the two figures, but when projecting the future for the S&P 500, the difference in expectations between these two sources would be magnified into a 200 point difference in the projected value of the S&P 500 should investors come to focus upon 2019-Q4 in setting current day stock prices, compared to what we presented earlier this week, all because our alternative futures chart reflects only the CME Group's futures data.

One or both of these two projections for 2019-Q4's dividends per share is wrong. Which do you suppose is more wrong?

Just after the midpoint of 2019-Q2, we featured a chart showing that the number of dividend cuts that had been announced to date during the quarter was running well ahead of what had been recorded back in 2018-Q2 and was very nearly at levels that would indicate recessionary conditions were affecting parts of the U.S. economy.

It's almost a month later and, as you can see in the following chart showing the cumulative number of dividend cuts we've been able to sample during the quarter through Friday, 14 June 2019, the U.S. economy would appear to be catching some of its breath in the second half of 2019-Q2, where the pace of dividend cuts being announced has slowed considerably.

Here are the five firms we've added to our sampling of 2019-Q2's dividend cuts, all of which set their dividends independently of their revenues, earnings, or cash flow, even though three of the firms are Real Estate Investment Trusts (or REITs):

• Daktronics (NASDAQ: DAKT)
• Guess (NYSE: GES)
• Ellington Residential Mortgage REIT (NYSE: EARN)
• Anworth Mortgage Asset (REIT) (NYSE: ANH)
• Ashford Hospitality Trust (REIT) (NYSE: AHT)

The biggest change from earlier in the quarter has been the absence of oil and gas royalty trusts, where falling oil prices during the fourth quarter of 2018 led to dividends being cut during the first one-and-a-half quarters of 2019. Unfortunately, even though the price of West Texas Intermediate crude oil rebounded after its 2018-Q4 decline during 2019-Q1, those prices peaked and began falling again in late April 2019. Assuming a similar lag, we anticipate we'll see more dividend cuts from this sector of the U.S. economy from its distressed business environment in the upcoming months of 2019-Q3.

The other change we've seen during 2019-Q2 is an increase over 2019-Q1 for the number of financial firms and Real Estate Investment Trusts that have announced dividend cuts, which itself is a lagging outcome of the Federal Reserve's rising interest rates during 2018, whose effective level peaked in 2019-Q1. Since then, U.S. interest rates have begun to fall, dramatically in the case of mortgage rates, but short term rates remain elevated as firms that are sensitive to rate hikes are still shaking off the damage, which is why we're seeing this sector show up in the count of dividend cuts in higher numbers.

Overall, the pace of dividend cuts during 2019-Q2 through this point of time is on par with what we saw during 2019-Q1, where both quarters are well elevated over the same quarters in 2018. We'll wrap up 2019-Q2 in early July.

Until then, one important factor to realize is that while we focus on the U.S. in our analysis, the full scale of the story is much bigger.

References

Seeking Alpha Market Currents. Filtered for Dividends. [Online Database]. Accessed 14 June 2019.

Wall Street Journal. Dividend Declarations. [Online Database]. Accessed 14 June 2019.