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.
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
- Headline before the open: Oil prices fall on oversupply concern as Libyan output seesaws
- Headline after the close: Oil up more than one percent on eighth weekly U.S. crude drawdown
- U.S. new home sales hit seven-month low as prices soar
- Wall Street falls as Trump threatens government shutdown - for the S&P 500, stocks fell by 8.47 points (or 0.345%), which is the market's way of saying "Is there a mosquito in here?"
- 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.