Unexpectedly Intriguing!
28 August 2017

The fourth week of August 2017 provided an almost textbook example of how stock prices behave when investor expectations are closely aligned with the signals being sent by the economy's major players.

Specifically, we're referring to what appears to be a very strong focus by investors on the distant future quarter of 2018-Q2 in setting the week's stock prices. In the latest update to our chart showing the alternate trajectories that the S&P 500 would be most likely to take when investors are focused on different points of time in the future, we find that the trajectory associated with 2018-Q2 most closely corresponds with the actual trajectory that the index took throughout Week 4 of August 2017.

Alternative Futures - S&P 500 - 2017Q3 - Standard Model - Snapshot on 25 August 2017

With the Federal Reserve's annual Jackson Hole vacation/meeting going on during this week, the statements being issued by Fed officials would draw close attention by investors looking for any potential changes for what to expect in the central bank's monetary policies in upcoming quarters, where the main messages coming out from the week is to expect no major changes until sometime in the first half of 2018, and most likely, in 2018-Q2.

That assessment is mirrored in the probability of changes in the Federal Funds Rate being announced at various points of time in the future, as given by the CME Group's FedWatch tool. The table below summarizes the snapshot of what those probabilities are as of the close of trading on Friday, 25 August 2017.

Probabilities for Target Federal Funds Rate Falling Within Indicated Basis Point Range at Selected Upcoming Fed Meeting Dates
FOMC Meeting Date 100-125 bps 125-150 bps 150-175 bps 175-200 bps 200-225 bps
20-Sep-2017 (2017-Q3) 98.6% 1.4% 0.0% 0.0% 0.0%
13-Dec-2017 (2017-Q4) 58.0% 39.9% 2.1% 0.0% 0.0%
21-Mar-2018 (2018-Q1) 48.2% 43.0% 8.5% 0.4% 0.0%
13-Jun-2018 (2018-Q2) 39.8% 43.9% 14.5% 1.8% 0.1%
Current target range is 100-125 bps.
("bps" = Basis Points. 100 basis points corresponds to an interest rate of 1.00%.)
Shaded rows indicate greater than 50% probability of change from current target range.
Boldface font indicates target range with highest expected probability.
Data in table taken from CME Group FedWatch Tool as of 25 August 2017.

For additional context, the expectation that the Fed's next change in short term U.S. interest rates won't happen until 2018 is also strongly suggested in the week's market-moving news headlines.

Monday, 21 August 2017
Tuesday, 22 August 2017
Wednesday, 23 August 2017
Thursday, 24 August 2017
Friday, 25 August 2017

At The Big Picture, Barry Ritholtz summarizes the positives and negatives for the U.S. economy and markets in Week 4 of August 2017.

As new information becomes available, investor expectations for the future will shift accordingly, and so will stock prices. It's the random part of the nature for how stock prices work.

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