Unexpectedly Intriguing!
July 24, 2017

In Week 3 of July 2017, the S&P 500 continued to set new all time highs, with the newest peak closing value of 2473.83 set on Wednesday, 19 July 2017.

No real surprise there, right? With investors apparently focused on 2018-Q1, the S&P 500 is behaving pretty much as our dividend futures-based forecasting model anticipated.

Alternative Futures - S&P 500 - 2017Q3 - Standard Model - Snapshot on 21 July 2017

Coming into the fourth week of July 2017, we anticipate that our dividend forecasting model will be affected by the echoes of past volatility in stock prices during this week and the next, where we expect that our model's projections will fall on the high side of the actual trajectory of the S&P 500. This is an artifact of our model's use of historic stock prices as the base reference points from which we project future stock prices, where we've found that simply "connecting the dots" of the projections on either side of the period affected by the volatility echoes has worked well as a tool to correct the effect. Because of the short duration of the upcoming echo, we'll leave that as an exercise for you!

To help save time and effort, you'll only want to do that with the projections associated with how far forward in time investors are currently focusing their attention. While you can use our alternative futures chart to help determine which point of time in the future investors are focusing upon, we're test driving the CME Group's FedWatch Tool for that purpose.

Here, you will be looking for the timing of when investors are betting real money that the Fed will change its Federal Funds Rate. Currently, the FedWatch tool is indicating the following probabilities of the Fed changing short term U.S. interest rates from their current range of 100-125 basis points (bps, or 1.00%-1.25%) at each of their meetings near the end of upcoming quarters:

  • 2017-Q3 - 20 September 2017
    • Maintain at 100-125 bps = 92.2%
    • Increase to 125-150 bps = 7.7%
    • Increase to 150-175 bps = 0.1%
  • 2017-Q4 - 13 December 2017
    • Maintain at 100-125 bps = 53.0%
    • Increase to 125-150 bps = 42.8%
    • Increase to 150-175 bps = 4.0%
    • Increase to 175-200 bps = 0.1%
  • 2018-Q1 - 21 March 2018
    • Maintain at 100-125 bps = 42.2%
    • Increase to 125-150 bps = 44.5%
    • Increase to 150-175 bps = 12.0%
    • Increase to 175-200 bps = 1.2%
    • Increase to 200-225 bps = 0.1%

Looking at these probabilities, we see that it is not until 2018-Q1 that investors will give the greatest likelihood that the Fed will act to change the Federal Funds Rate by increasing it by 25 bps, which would make that the future point of time to which investors are currently focusing their attention.

Expectations about the Fed's plans for short term U.S. interest rates is however just one of many factors that can affect how far into the future investors are looking today. New information about the business environment for U.S. companies can also drive investors to shift their forward-looking focus to different points of time in the future, which will be a factor throughout the current earnings season now underway, so it will to your advantage to also keep up on that kind of news.

Speaking of which, here are the potentially market-moving headlines that caught our attention during the past week.

Monday, 17 July 2017
Tuesday, 18 July 2017
Wednesday, 19 July 2017
Thursday, 20 July 2017
Friday, 21 July 2017

For a short list of the week's positive and negative markets and economy news, Barry Ritholtz has you covered!

On an afternote, we incorrectly identified last week as Week 3 of July 2017, which we've since corrected in that previous post. This is an unfortunate consequence of our spending much of our time in the future, where we occasionally lose track of exactly where we are when we shift back to the present (it's timey-wimey, wibbly-wobbly stuff - just bear with us and we'll eventually get it sorted out!)

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