Unexpectedly Intriguing!
June 1, 2020

The upside down stock market has continued powering upward, with the S&P 500 (Index: SPX) breaking back above the 3,000 level to close the month of May at 3,044.31. That's both 341.84 points (about 10.1%) below where the market peaked back on 19 February 2020 and 806.91 points (about 36.1%) above where the S&P 500 bottomed on 23 March 2020.

Overall, the trajectory of the S&P 500 is continuing to track along within the lower half of the dynamic redzone forecast range we defined for the upside down stock market based on the dividend futures-based model back on 20 April 2020.

Alternative Futures - S&P 500 - 2020Q2 - Standard Model (m=-1 from 13 April 2020) - Snapshot on 30 May 2020

We describe the stock market as upside down because investors the expected change in the year over year growth rate of the S&P 500's dividends per share has been negative, where the following chart shows what the CME Group's quarterly dividend futures for the index indicates investors are expecting for the future through June 2021 as of 29 May 2020.

Past and Projected Quarterly Dividends Futures for the S&P 500, 2019-Q2 through 2021-Q2, Snapshot on  29 May 2020

As best as we can tell, the upside down stock market has resulted from investors incorporating expectations for the potential adoption of negative interest rates by the U.S. Federal Reserve, although at present the CME Group's FedWatch tool would appear to be giving a 99.4% probability the Fed will maintain its Federal Funds Rate within the zero bound range of 0% and 0.25% for the indefinite future.

CME Group FedWatch Tool Probabilities of Federal Funds Rate Changing at Future FOMC Meeting Dates, Snapshot on 29 May 2020

However, that may be the wrong way to interpret what the FedWatch tool is currently indicating. Since the CME Group's analysts have never adapted the tool to accommodate the probability of negative interest rates, which have most certainly been on the minds of both investors and central bankers in recent weeks, it may be more accurate to say that investors are giving a 99.4% probability of the Federal Funds Rate being held within the range of 0% to 0.25% or less into the indefinite future.

For their part, Fed officials have been actively trying to diminish those expectations during the last several weeks, where you can get caught up with the latest in our wrapup of the major market-moving headlines from the Memorial Day-holiday shortened trading week.

Tuesday, 26 May 2020
Wednesday, 27 May 2020
Thursday, 28 May 2020
Friday, 29 May 2020

Meanwhile, Barry Ritholtz succinctly summarizes the positives and negatives he found in the past week's markets and economy news as only he can.


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