As expected, the S&P 500 (Index: SPX) continues to experience an impressive amount of volatility on a day-to-day basis.
Since we've been appending updated bits of analysis to our previous S&P 500 chaos posting during each day of the past week, we're going to focus this new edition on what happened on Friday, 6 March 2020, after we animate all the moves that took place since the close of trading on Friday, 28 February 2020 and quickly summarize the week that was. If you're accessing this article on a site that republishes our RSS news feed, please click through to our site to access the animation:
Each of the large swings in stock prices during the previous week coincided with major swings in how far into the future investors were focusing their attention, as changing expectations for the size and timing of interest rate cuts by the U.S. Federal Reserve led investors to alter their forward-looking focus back and forth between 2020-Q2 and 2020-Q4 from Friday, 28 February 2020 through Thursday, 5 March 2020. The following animated image captures those changes during the week ending on Friday, 6 March 2020, where the thing we want to point out is how little changed those expectations were between Thursday, 5 March 2020 and Friday, 6 March 2020.
On Friday, 6 March 2020, the dividend futures-based model indicated that investors shifted their attention more toward 2020-Q2, but unlike the previous days in the week, that change was unaccompanied by a change in the probabilities of the size and timing of how the Fed will change the Federal Funds Rate.
The big thing that changed on Friday, 6 March 2020 were the expectations for future dividends, which saw declines in the amount of cash dividends projected to be paid in upcoming future quarters from 2020-Q2 through 2020-Q4. In the following chart, we've animated the daily closing values indicated by the CME Group's futures for S&P 500 quarterly dividends for the future quarters of 2020-Q1 (which may still be in some flux until the dividend futures contracts for the quarter expire on the third Friday of March) through 2020-Q4, for each trading day from Friday, 28 February 2020 through Friday, 6 March 2020.
From Friday, 28 February 2020 through Thursday, 5 March 2020, the day-to-day changes in the S&P 500's expected future quarterly dividends is largely consistent with day-to-day noise in these futures. On Friday, 6 March 2020, we see significant decreases in the amount of dividends expected to be paid out in the future quarters of 2020-Q2 through 2020-Q4, which adds a new, downward force to affect stock prices.
This so far speculative change will work to concentrate investor focus on 2020-Q2, since this will be the period in which companies affected by the developing global economic situation resulting from China's coronavirus breakout will begin announcing changes in their business outlooks and their future dividend payouts.
Regardless, the S&P 500 has now entered into a new phase of its current period of volatility, where changes in expected future dividends, the fundamental driver of stock prices, will affect changes in stock prices.
Speaking of which, here is a more comprehensive listing of the past week's market-moving headlines than what we've previously presented in our daily appendices:
- Monday, 2 March 2020
- Oil up over 4% as hopes of OPEC cut, stimulus counter virus gloom
- Bigger trouble developing all over:
- Coronavirus hits global factories; chances of monetary policy easing rise
- Take Five: The virus data fog
- China's factories at risk of double whammy as coronavirus hits South Korea, Japan
- U.S. manufacturing sector stalls as coronavirus hits supply chains
- Bigger stimulus under development:
- Trump presses U.S. Federal Reserve to cut rates
- ECB can do more if needed, but we're not there yet: Villeroy
- Big central banks discussing coronavirus-related volatility: ECB
- ECB should not have to act on every shock: Wunsch
- ECB ready to act as needed on coronavirus: de Guindos
- IMF, World Bank say ready to address economic challenges of coronavirus
- Powell and Mnuchin will lead G-7 emergency call on the coronavirus Tuesday
- Wall Street roars back, sparked by stimulus hopes
- Tuesday, 3 March 2020
- Oil lower on coronavirus fears despite Fed rate cut and hopes for OPEC+ output cut
- G7 fails to deliver specific measures to offset negative economic impact of coronavirus epidemic, global 'flight to safety' in U.S. treasuries:
- U.S. 10-year yields drop below 1% for first time ever
- G7 to employ 'all appropriate tools' to combat coronavirus risks
- World Bank, Fed, Australia central bank minions act to counter economic impact of China's coronavirus epidemic:
- World Bank announces up to $12 billion in immediate funds for coronavirus
- Fed slashes rates in emergency move to combat coronavirus risk
- Powell says coronavirus outbreak poses material risk to outlook
- Fed virus-driven cut may test new approach to inflation
- Trump calls on Fed to cut rates further after emergency move
- Australia's central bank cuts rates to shake off virus fears
- ECB, Eurozone government minions remain noncommittal
- ECB ready to take 'targeted' steps on coronavirus: Lagarde
- ECB ready to support economy, but governments must help, Villeroy says
- No need for imminent ECB action on coronavirus: ECB's Kazimir
- Wall St ends more than 2% lower after Fed surprise rate cut
- Wednesday, 4 March 2020
- Oil gives up gains even as OPEC works on big output cut
- Bigger trouble developing in Eurozone, Japan:
- S&P Global halves eurozone growth forecast, flags gloom for Italy
- Bank of Japan's Kuroda offers bleak view on economy, warns of damage from coronavirus
- Over 60% of Japan firms seeing earnings hit by coronavirus: survey
- Fed minions claim to have right policy, but want others:
- After slashing rates, U.S. Fed has more weapons to fight coronavirus effect
- In next recession, Fed needs upfront promises, former staffers say
- Fed's Bullard says policy now in the right place to address coronavirus risks (how does he know?)
- Fed's Mester says coronavirus uncertainty could lead to demand shock: CNBC
- Market screams for more liquidity:
- Stocks Climb on Spending to Combat Coronavirus, Biden Primary Victories
- Thursday, 5 March 2020
- Oil slides as demand worries overshadow OPEC deal to deepen supply cuts
- Coronavirus economic impact rippling across globe:
- China says consumer sales steadying after virus hit, trade still tough
- Shortage of Chinese parts caused $50 billion fall in February's global exports: U.N.
- Canceled bookings, empty rooms: coronavirus takes toll on tourism
- Coronavirus hit to airlines could top $100 billion, Flybe collapses
- California declares emergency over coronavirus as death toll rises in U.S.
- Term Repo Record Oversubscribed As Market Liquidity Craters
- Wall Street plunges as coronavirus slams bank, travel stocks
- Friday, 6 March 2020
- Oil plunges to lowest since 2017 after Russia rejects steep OPEC cut
- Global recession risks have risen due to coronavirus: Moody's
- Bigger stimulus developing in the U.S. to reduce pain from coronavirus recession
- U.S. may take targeted steps to stimulate economy amid coronavirus: Kudlow
- Once unthinkable, negative Treasury yields enter the realm of possibility
- Fed needs wider QE mandate to deal with economic downturns: Rosengren (including buying and holding stocks?)
- U.S. job growth robust before coronavirus outbreak hit shores
- U.S. should help workers who lose pay if coronavirus worsens: Fed's Evans
- Fed minions speak out on wisdom of emergency half point rate cut:
- Fed's Kashkari says he supported rate cut as 'insurance' in face of uncertainty
- Fed's Kaplan says wise to act 'boldly' on monetary policy in face of threats
- Fed's Mester: Post-meeting statement should be more detailed
- Fed's Bullard Calls for Alternative Model to Deal With Low Inflation
- Bigger trouble developing in China:
- China's first-quarter economic hit from coronavirus looking more severe: Reuters poll
- China metal inventories scale new highs as demand makes slow recovery from virus
- China warns metals firms not to race back from virus
- ECB minions spectating from sidelines:
- Coronavirus concerns pummel major indexes as investors flee to bonds
Barry Ritholtz listed the positives and negatives he found in the past week's economics and market-related news.
As the market's volatility remains elevated, we'll append daily updates to the original version of this article. Meanwhile, previous posts in our S&P 500 chaos series are also available.
Venturing Into Bear Territory...
Update 9 March 2020 at 9:05 PM Eastern: There's nothing quite like throwing oil onto a market fire, is there? Here is the biggest market moving headline for the day:
The effect on stock prices was drastic, with the S&P 500 dropping 7.60% for the largest single day decline since Thursday, 9 October 2008, when stock prices dove by 7.62% in the midst of the global financial crisis, though the large drop on this day was precipitated by new the bottom was set to fall out from the automotive industry.
Flash forward to 2020, the global automotive industry is again on the rocks, but the collapse in oil prices as Saudi Arabia, upset that Russia wouldn't go along with cutting oil output, reacted by initiating a price war, promising to sharply increase its production and sending global oil prices sharply lower.
That affects the outlook for the S&P 500 because U.S. oil producers have become exporters to the global market, where the decline in oil prices will negatively impact their bottom lines. So much so that the S&P 500's quarterly dividends per share projected for both 2020-Q3 and 2020-Q4 plunged on the day's news.
We've updated the three charts we presented in the original article. Please click on the following individual images to access larger versions of the charts.
It looks like the S&P 500 has overshot the typical range of values the dividend futures-based model anticipates the S&P 500 would be with investors closely focused on 2020-Q2 in setting current day stock prices. That could be good in that it suggests the market may be predisposed to rebound a bit, but that hinges in good part on the random onset of new information, which may give investors other ideas.
Meanwhile, investors appear to be baking in at least a three quarter point rate cut by the U.S. Federal Reserve, though they are giving elevated odds of the Fed cutting rates to near zero at the Federal Open Market Committee's next meeting in less than two weeks.
On a final note, the S&P 500 has only seen six larger daily percentage declines since January 1950 than it did on Monday, 9 March 2020. The largest two date back to October 1987, and the remaining four are linked to different points of the global financial crisis and other formative events for the Great Recession that took place just before or during the last quarter of 2008.
S&P 500 Completes Second Lévy Flight Event of 2020
Update 10 March 2020: The S&P 500 rebounded today, though not without significant noise related to whether the U.S. Congress would come forward with fiscal stimulus. Although the market started out up by 7% in pre-trading, nearly all that gain was loss when news broke that House Speaker Nancy Pelosi indicated her party wouldn't be ready to meet on a fiscal plan this week, but recovered somewhat when Treasury Secretary Steven Mnuchin communicated there was "bipartisan urgency" for such a package later in the day.
See what we meant when we said that a rebound in stock prices today "hinges in good part on the random onset of new information"?
Ultimately, the S&P 500 rebounded back up to the level the dividend futures-based model indicates it would be if investors were closely focused on 2020-Q2 in setting current day stock prices. In doing so, the S&P 500 completed the second Lévy flight event of 2020, with investors have transferred their attention from the distant future quarter of 2020-Q4 to the much nearer term future of 2020-Q2.
Since there wasn't much change in the expectations for future S&P 500 quarter dividends, we'll present the alternative futures chart showing the latest update to the actual trajectory of the S&P 500 and the latest update to the CME Group's FedWatch Tool's indicated probabilities for future changes in the Federal Funds Rate. Please click on the individual images to access larger versions of these charts.
Now that it has arrived here, will the market's volatility settle down somewhat and stabilize? Stay tuned!...
Descending Into A True Bear Market...
Update 11 March 2020: The flow of news is such that the market doesn't look like it will be likely to stabilize anytime soon, and that's before bigger, badder news broke after the market closed:
Here are the latest updates to the three charts we've featured above. Please click on the following individual images to access larger versions of the charts.
Aside from the drop in the level of the S&P 500, which we'll get to in just a moment, investors are now expecting the Fed to slash the Federal Funds Rate to the zero bound range when they meet next week, and expectations for future dividends dipped through 2020-Q4, and although it's not shown in the chart, they dropped significantly for 2021-Q1.
Looking at what the dividend futures model is communicating for the future of the S&P 500, we are at the point where the future for stock prices is locking in at a much lower level, which you can see in the lower right hand corner of the alternative futures chart. That lower level has been forming since the S&P 500's second Lévy flight event began, and with the flight now complete, what is to stop stock prices from proceeding to that now defined lower level sooner rather than waiting a week before going there later as the standard dividend futures-based model suggests?
That thought has been in the back of our minds since yesterday's update. We could add one of our redzone-style forecast ranges to show that transition on the chart, but given the heightened volatility, it would make for a rather large block to show on the chart in a relatively small space, so it wouldn't provide much benefit in visually communicating the scenario we described. The best case scenario would be for investors to find a reason to shift their forward looking focus to either 2020-Q3 or 2020-Q4, but at this point, that would mean stock prices moving sideways, and it is unclear what kind of new information could achieve that effect at this time.
We alluded to it at the beginning of this update, but the World Health Organization's declaration that the coronavirus epidemic that originated in China has become a global pandemic, combined with news indicating its rapid spread that came out after the market closed, may mean we'll see the scenario we just described play out as early as tomorrow. We'll find out soon enough.
The Bottom Keeps Dropping
Update 12 March 2020: As expected, rather than waiting, the S&P 500 dropped to the lower level the dividend-futures model was signaling they would if investors remained closely focused on 2020-Q2 sooner. We finally hit on the idea of using a simple red arrow in the alternative futures chart below to show that correspondence and the S&P 500's earlier arrival at this level than the model had projected several weeks ago. At the same time, expectations for the S&P 500's future dividend payouts in 2020-Q2, 2020-Q3, and 2020-Q4 were also walloped on the day, which we've shown in the second chart.
We're omitting the day's update for the chart of the CME Group's FedWatch Tool's probabilities of Federal Funds Rate changes since it really didn't change from Wednesday, 11 March 2020. We're thinking there may not be much more to see there until they adapt it to accommodate negative interest rates.
Speaking of the Fed, they launched a $1.5 trillion bazooka in looking to flood the repo market with liquidity, only to find out that wasn't the kind of liquidity the market was looking for. At the same time, they also removed any remaining difference between the quantitative easing-like program they have been operating and the kind of QE the market came to know during the Obama administration.
All that wasn't enough, and to be fair, that may have a lot to do with the sheer monetary and fiscal policy fecklessness that's going on in Europe. Now is one of those times when coordinated actions by central banks were needed, and the ECB chose to keep standing on the sidelines, tanking global stock prices as a result.
Want to know what scares us? Look at the bottom right corner of the alternative futures chart. That future hasn't yet been fixed, but if today's change in dividend futures holds, we may once again find the S&P 500 looking to drop faster than even the dividend futures model can handle.
And that's saying something, since we developed the key insight behind it in late 2008 and early 2009 when the S&P 500 was experiencing a similarly cratering market!
In any case, we're going to change gears tomorrow to take a needed break from the daily coronavirus-caused market carnage, then we'll be back on Monday in our regular S&P 500 chaos series posting to wrap up the week.