Unexpectedly Intriguing!
October 14, 2019

The S&P 500 (Index: SPX) rose sharply at the end of the second week of October 2019, boosted by news of the Fed's plan to buy $60 billion in Treasury bills each month well into 2020 and also the "phase one" announcement of a partial trade deal between the U.S. and China.

The following spaghetti forecast chart indicating the potential trajectories the S&P 500 might take depending upon how far into the future investors might be compelled to focus their forward-looking attention during 2019-Q4 shows that latest action:

Alternative Futures - S&P 500 - 2019Q4 - Standard Model with Redzone Forecast with 50/50 Split Focus on 2019-Q4 and 2020-Q1 from 8 October 2019 through 8 November 2019 - Snapshot on 11 Oct 2019

We've added a redzone forecast to our chart, which is based on our assumption that investors are roughly equally splitting their forward-looking attention between 2019-Q4 and 2020-Q1 in setting today's stock prices, which we also assume will largely continue through 8 November 2019. This particular redzone forecast closely coincides with the trajectory that might apply if investors were to shift their attention to the much more distant time horizon of 2020-Q3, but we as yet see no evidence in the flow of new information shaping investor expectations that may be the case.

The Fed's action appears to have followed an emergency videoconference meeting of the Open Market Committee on 4 October 2019. With the practical assessment that the Fed has decided to re-initiate its Great Recession-era quantitative easing policies in all but name, investors have reconsidered the likelihood of the Fed also continuing to reduce the Federal Funds Rate in both 2019-Q4 and 2020-Q1. As of the close of trading Friday, 11 October 2019, investors seem to be betting on just one quarter point rate cut in 2019-Q4, coming as early as the end of October 2019, with a less-than-50% probability of another rate cut in 2020-Q1.

CME Group FedWatch Tool Probabilities of Federal Funds Rate Changing at Future FOMC Meeting Dates, Snapshot on 11 October 2019

That change in expectations would account for the apparent split in focus between 2019-Q4 and 2020-Q4 in the alternate futures spaghetti forecast chart above, where the odds of a rate cut in 2020-Q1 are in flux. The headlines we believe reflect the flow of new information that contributed to shaping investor expectations during the trading week ending Friday, 11 October 2019 are below:

Monday, 7 October 2019
Tuesday, 8 October 2019
Wednesday, 9 October 2019
Thursday, 10 October 2019
Friday, 11 October 2019

The Big Picture's Barry Ritholtz outlined six positives and six negatives from the past week's economics and market-related news. One of the negatives is political noise, so on the whole, a net positive week!

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