Unexpectedly Intriguing!
07 August 2017

The first week of August 2017 saw the Dow Jones Industrial Average (Index: DJI) progressively hit new closing highs throughout the week, but the S&P 500 (Index: INX) did not, where it fell below its record closing value of 2477.83 set on 27 July 2017 in the previous week.

For the S&P 500 then, stock prices mainly moved sideways during Week 1 of August 2017.

Alternative Futures - S&P 500 - 2017Q3 - Standard Model - Snapshot on 04 August 2017

Now that we're outside the echo of past volatility, our dividend futures-based model for forecasting stock prices suggests that investors may have shifted their forward-looking focus from 2018-Q1 to the more distant future quarter of 2018-Q2, although the level of the S&P 500 is still falling within the typical range of variation that we would expect if investors were focused on 2018-Q1.

Checking that observation against the CME Group's Fedwatch tool as of 4 August 2017, which specifically estimates the probability of the timing of the Fed's next change for short term interest rates in the U.S. from their current range of of 100-125 basis points (bps), we find the following odds predicted for the following potential changes at upcoming FOMC meetings:

  • 2017-Q3 (20 September 2017)
    • No change from 100-125 bps: 98.6%
    • Increase to 125-150 bps: 1.4%.
  • 2017-Q4 (13 December 2017)
    • No change from 100-125 bps: 52.0%.
    • Increase to 125-150 bps: 44.8%.
    • Increase to 150-175 bps: 3.2%.
  • 2018-Q1 (21 March 2018)
    • No change from 100-125 bps: 42.3%.
    • Increase to 125-150 bps: 45.9%.
    • Increase to 150-175 bps: 11.0%.
    • Increase to 175-200 bps: 0.8%.
  • 2018-Q2 (13 June 2018)
    • No change from 100-125 bps: 30.8%.
    • Increase to 125-150 bps: 44.5%.
    • Increase to 150-175 bps: 20.5%.
    • Increase to 175-200 bps: 3.8%.
    • Increase to 200-225 bps: 0.3%.

These indicated probabilities suggest that the investors who are willing to bet money on when they expect that the Fed will next act to change short term interest rates are pretty ambivalent between 2018-Q1 and 2018-Q2 as the quarter in which the Fed might actually do so, which pretty much mirrors what we're seeing in our model.

Of course, other factors might influence investors to shift their attention toward other points of time in the future, so we still have to keep our eyes on the new potentially market moving headlines that come out each week.

Monday, 31 July 2017
Tuesday, 1 August 2017
Wednesday, 2 August 2017
Thursday, 3 August 2017
Friday, 4 August 2017

Barry Ritholtz succinctly summarized the positives and negatives for the U.S. economy and markets in Week 1 of August 2017.

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