Unexpectedly Intriguing!
16 December 2019

For the S&P 500 (Index: SPX), the biggest story of the second week of December 2019 came with the confirmation the U.S. and China had struck a 'Phase 1' trade deal, which pushed the index to close the week once again at record highs. As of Friday, 13 December 2019, the highest closing value ever recorded for the S&P 500 reached 3,168.80, where though news of the deal broke on Thursday and boosted stock prices near that height, there was just enough momentum to carry the S&P just slightly higher to end the week.

Alternative Futures - S&P 500 - 2019Q4 - Standard Model with Redzone Forecast Focused-on-2020Q3-Between 26-Nov-2019 and 07-Jan-2020 - Snapshot on 13 Dec 2019

With that trade deal now falling back in the rear view mirror, the second biggest news item of the week offered a glimpse of what might come to dominate the attention of investors in the weeks ahead, because the Federal Reserve met and did nothing, while also establishing the expectation they won't be adjusting interest rates in 2020. The CME Group's FedWatch Tool has captured much of that change in future expectations, where it now gives better than even odds that the earliest the Fed might next cut the Federal Funds Rate would be in the fourth quarter of 2020, though the odds of a rate cut in 2020-Q3 are still close to the 50% mark.

CME Group FedWatch Tool Probabilities of Federal Funds Rate Changing at Future FOMC Meeting Dates, Snapshot on 13 December 2019

Going by the dividend futures-based model we use to create the alternate futures chart above, a shift in the forward-looking focus of investors from 2020-Q3 to 2020-Q4 would be accompanied by a decline in the S&P 500, in which we would see stock prices drop potentially well below the redzone forecast range, which assumes they remain focused on 2020-Q3 in setting current day stock prices. Should they shift their focus toward the nearer term quarter of 2020-Q1 however, there would be little impact to stock prices because the expectations for the changes in the year over year rates of dividend growth are similar between 2020-Q1 and 2020-Q3.

The random onset of new information would be responsible for driving such a shift in focus, where the following headlines we extracted from last week's news flow provide the context for why we believe investors have largely been focusing on 2020-Q3 in recent weeks.

Monday, 9 December 2019
Tuesday, 10 December 2019
Wednesday, 11 December 2019
Thursday, 12 December 2019
Friday, 13 December 2019

Meanwhile, Barry Ritholtz itemized the positives and negatives he found in the week's economics and market-related news.

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