Unexpectedly Intriguing!
10 June 2019

It's a sign of just how volatile the S&P 500 (Index: SPX) has become in recent weeks that we're using the phrase "Lévy flight events" to describe the recent changes in the level of stock prices.

If you're new to the kind of analysis we do, a Lévy flight is simply described a "type of random walk with clusters of short steps connected by rarer long steps" that describes how chaotic systems behave. We most often focus on the rarer long steps that stock prices take whenever they take "flight" and change value by a comparatively large amount during a short period of time, which our dividend futures-based model sees as investors shifting how far forward they are looking in time while making their current day investment decisions.

The S&P 500 didn't disappoint during the first week of June 2019, where we find that the rebound the index has recorded is now nearly complete, with investors once again having shifted their forward-looking focus back out to 2020-Q1 in setting current day stock prices, after having fixed their attention on 2019-Q3/Q4 just a week earlier.

Alternative Futures - S&P 500 - 2019Q2 - Standard Model - Snapshot on 7 Jun 2019

We believe the impetus for the shift in investor focus lies in the suddenly increased expectations for a third quarter point cut in the Federal Funds Rate by the U.S. Federal Reserve, which would follow two other quarter point reductions, one in 2019-Q3 and one in 2019-Q4, the expectations for which had been set in previous weeks. The following table from the CME Group's FedWatch Tool outlines the probabilities that investors have implied for these potential rate reductions by betting on Federal Funds Rate futures as of the end of trading on Friday, 7 June 2019.

CME Group FedWatch Tool - Probabilities of Federal Funds Rate Changes at Selected Upcoming Federal Reserve Meetings - Snapshot 7 June 2019

The reason why these expectations have evolved as they have is because of the new information that investors have absorbed over the past week, much of which points to slowing economies in much of the world. Here are the more prominent market moving headlines we extracted from the flow of news during the past week.

Monday, 3 June 2019
Tuesday, 4 June 2019
Wednesday, 5 June 2019
Thursday, 6 June 2019
Friday, 7 June 2019

Beyond these headlines, Barry Ritholtz tallied 7 positives and 7 negatives in his survey of the week's major economic and market-related news.

With investors focusing once more on the distant future quarter of 2020-Q1, the next question is "for how long might that last?" Whether the S&P 500 embarks on a new flight or settles in for a lower level of volatility as part of its quantum random walk will hinge on the answer.

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