Unexpectedly Intriguing!
October 2, 2017

It's time once again to look both backwards and forwards for the S&P 500, where in the fourth week of September 2017, the index closed at a new all time high!

Alternative Futures - S&P 500 - 2017Q3 - Standard Model - Connected Dots for 2018-Q2 between 8 September 2017 and 8 November 2017 - Snapshot on 29 September 2017

After adjusting for the echo effect, where the past volatility of the stock prices that we use as the base reference points for projecting future stock prices affects the accuracy of our dividend futures-based model's projections, we find that the level of the S&P 500 is consistent with being on the high end of the trajectory associated with 2018-Q2, which suggests that investors are mostly focused on this future point of time.

Mostly, but not entirely. Having the S&P 500 tracking along near the top end of our adjusted forecast range for 2018-Q2 is an indication that investors are splitting a portion of their forward-looking attention between 2018-Q2 and at least one other point of time in the future, which our model suggests is either 2017-Q4 or 2018-Q3. Of these quarters, 2017-Q4 is significant in that, as of the close of trading on 29 September 2017, investors are expecting that the Federal Reserve will next act to increase short term interest rates in the U.S. in that quarter, while it appears that 2018-Q3 will coincide with another action by the Fed to increase the Federal Funds Rate further.

The table below shows the probabilities of the size and timing of the Fed's next increases in its Federal Funds Rate that the CME Group's FedWatch Tool was indicating for each of the indicated future quarters. The data for 2018-Q3 is a new bit of information that was added during the last week, which wasn't available at the time of our last update.

Probabilities for Target Federal Funds Rate at Selected Upcoming Fed Meeting Dates (CME FedWatch on 15 September 2017)
FOMC Meeting Date 75-100 bps 100-125 bps (Current) 125-150 bps 150-175 bps 175-200 bps 200-225 bps
13-Dec-2017 (2017-Q4) 0.0% 22.1% 76.4% 1.5% 0.0% 0.0%
12-Mar-2018 (2018-Q1) 0.0% 15.8% 60.7% 22.3% 1.2% 0.0%
13-Jun-2018 (2018-Q2) 0.0% 10.3% 45.0% 35.1% 8.9% 0.6%
26-Sep-2018 (2018-Q3) 0.0% 6.8% 33.0% 38.2% 18.0% 0.3%

In this table, we see that Federal Funds Rate futures speculators are betting that the Fed's next rate hike will be announced at the Fed's 13 December 2017 meeting, increasing its target range from 100-125 basis points to 125-150 basis points, which would account for why investors would be focusing some attention on 2017-Q4.

Looking beyond that quarter however, we see that there is over a 56% probability that the Fed will increase its target range from 125-150 to 150-175 basis points (or higher) by the time of the FOMC's September 2018 meeting, which is why that future quarter would now be on the radar of relevance for stock market investors.

As we've seen over the last several weeks however, the probabilities for Fed rate hikes can be very volatile. To get inside the Fed's thinking and the factors that can influence its decisions, we identified the following headlines for their market-moving potential over the course of Week 4 of September 2017.

Monday, 25 September 2017
Tuesday, 26 September 2017
Wednesday, 27 September 2017
Thursday, 28 September 2017
Friday, 29 September 2017

Elsewhere, Barry Ritholtz breaks down the positives and negatives for the U.S. economy and markets that were reported in the fourth and final week of September 2017.

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