Friday, 23 August 2019 saw some of the most interesting investor reactions to new information that we've seen this year. The day started with China's announcement it would impose larger tariffs on U.S. goods, which sent stock prices lower. Then, Federal Reserve chair Jerome Powell spoke at the Fed's annual retreat at Jackson Hole Wyoming, where he gave the impression the Fed saw the U.S. economy as being strong enough where investors shouldn't expect much in the way of more rate cuts in the weeks ahead, which caused stock prices to rebound somewhat, up to where they were close to flat on the day.
And then, President Donald Trump reacted to both of these events, where suddenly, investors were forced to consider the possibility that the Fed could be compelled to cut interest rates in the U.S. more dramatically before the end of 2019 to address the fallout from escalations in the U.S.-China trade war.
These dynamics compelled investors to shift their forward-looking attention from being split between 2019-Q4 and 2020-Q1 to instead be more tightly focused on 2019-Q4, sending stock prices significantly lower, with the S&P 500 (Index: SPX) closing the day down by 2.6%.
But that was last week. Looking ahead, we find that the short term echo of the stock market volatility that kicked up a month earlier should start affecting the accuracy of our dividend futures-based forecasting model by the end of the week ahead, similar to what we last observed in December 2018.
Now, as then, the volatility we're observing in stock prices is being principally driven by investors resetting their forward-looking time horizon from one point of time to others. In December 2018, the timing of those shifts proved to be very difficult to anticipate, where the random onset of new information directly drove those changes.
We anticipate the current market environment will be similarly chaotic in the weeks ahead, where we are curious to assess how well our 'standard' model might predict the future for stock prices without adjustment to compensate for the echo effect (as we do when we present redzone forecasts), where we'll be testing different techniques to compensate for the short term echo in our model's projections behind the scenes.
Meanwhile, to see what we mean for how new information causes investors to change how far forward in time they're looking in making their current day investment decisions, here are the major market-moving headlines we sampled from the past week.
- Monday, 19 August 2019
- Oil rises 2% after attack on Saudi field, stimulus expectations
- Bigger trouble developing in China all over:
- German economy could continue to shrink: Bundesbank
- Japan's exports slip for eighth month, sales to China drop as recession fears grow
- Faced with global downturn fears, Japan Inc avoids raising bonuses: Reuters poll
- Bigger stimulus developing in China:
- Trump says Fed should cut interest rates by one percentage point
- Wall Street rallies on hopes of global economic stimulus
- Tuesday, 20 August 2019
- Oil steadies as hopes of easing trade tensions lend support
- Bigger trouble developing in China all over:
- Latin America lacks ammunition to fight global economic slowdown
- U.S. Steel plans to lay off hundreds of workers in Michigan
- Bigger stimulus developing in China all over:
- China trims lending rates with new benchmark, more cuts expected
- Italy needs 50 billion euro budget for 'shock' stimulus: Salvini
- Trump looking at possible U.S. payroll, capital gains tax cuts
- Wall Street rally ends as financial shares slide
- Wednesday, 21 August 2019
- Oil steadies as U.S. crude stocks draw but fuel inventories rise
- Bigger trouble developing all over:
- Dropping global bond yields, recession fears put BOJ in a bind
- Exclusive: China's Tianjin government orders Bohai Steel restructuring start by September: sources
- Fed was divided on rate cut, wanted to avoid appearing on path for more cuts
- Instant View: July FOMC minutes - 25 basis points cut seen as a mid-cycle adjustment
- Trump heaps pressure on Fed and its chairman Powell to cut rates
- Fed's Kashkari says U.S. central bank should use forward guidance now: FT
- Stocks rise with focus on stimulus; U.S. yield curve briefly inverts
- Thursday, 22 August 2019
- Oil eases as Fed's Jackson Hole meeting gets underway
- U.S. 30-year, 15-year mortgage rates fall to lowest since Nov 2016: Freddie Mac
- U.S. factory sector contracts for first time in a decade: IHS Markit
- Fed's Powell, under pressure, likely to stick to 'mid-cycle' message
- Two Fed officials see no case for rate cut now; Kaplan 'open-minded'
- Fed's George says does not yet see signal of downturn in economy: CNBC
- Fed's George says she would be happy to keep rates at current levels
- S&P 500 stalls in economic data offset, ahead of Fed chair's speech
- Friday, 23 August 2019
- Oil prices slide as U.S.-China trade war escalates
- U.S. new home sales drop sharply, point to more housing weakness
- Something less than "whatever it takes" for stimulus in a weakening Eurozone economy:
- ECB's Weidmann sees no need for economic stimulus: newspaper
- Fed's Clarida says global economy has worsened since July: CNBC
- UK economy headed for stagnation in third quarter: BoE's Carney
- Something less than "whatever it takes" for stimulus from the Fed in a weakening U.S. economy:
- Powell: Fed to act as appropriate to keep expansion going
- Fed's Mester says approaching Fed's next policy meeting with open mind: CNBC
- Fed's Bullard says a 'robust debate' is coming over steep rate cut
- Trump asks who is bigger enemy, Fed Chair Powell or China's Xi?
- Fed's Kaplan: trade, immigration affecting U.S. economy, not monetary policy
- U.S.-China trade war heats up:
- China strikes back at U.S. with new tariffs on $75 billion in goods
- Trump's China trade comments send US stocks tumbling
- Dow plummets more than 600 points after Trump orders US manufacturers to leave China
For a week that was as unbalanced as the third week of August 2019 was, Barry Ritholtz has a remarkably balanced list of 5 positives and 5 negatives he found in the week's economics and market-related news. Do check it out to get a bigger picture of what was in the week's news than the headlines we highlighted above.