There was exactly one big story driving the action for the S&P 500 (Index: SPX) in the final week of February 2021. Incoming data suggested the specter of inflation is not as distant as had been assumed. With its appearance, investors who had hedged their bond investments by buying stocks were shocked into selling to cover their losses as real interest rates for the 10-year U.S. Treasury rose above 1.5%.

For the S&P 500, although stock prices saw considerable volatility during the week, investors appeared to largely maintain their forward-looking focus on 2021-Q2, with the index' level remaining within the redzone forecast range we described in our previous update.

The new volatility does raise an interesting question for our redzone forecast. What would it mean if the level of the S&P 500 moved outside of the indicated range?

From our perspective, all that means is that circumstances have overridden the assumptions we made when we established it. As shown, it is based on the premise that investors would be focused on 2021-Q2 in setting current day stock prices in the early period covered by the redzone forecast, where they would transition to focusing on the more distant future quarter of 2021-Q4 sometime after March 2021.

But, a shock event like the bond market's 'tantrum without a taper' could compel investors to shift their focus to a different point of time in the future. At present, assuming no change in the expectations for future dividends, the worst case would be if investors shifted their focus to the current quarter of 2021-Q1, where they would be watching for the Federal Reserve's response to the bond market's 'tantrum' within this quarter. If that happened, stock prices could fall on the order of somewhere between 200-300 points. In the alternative futures chart, we would see the level of the S&P 500 drop below the redzone forecast range.

If investor expectations for future dividends change on top of that, then level to which the S&P 500 might go in that scenario would be affected to the extent those expectations change. We would see that change through the changing levels of the dividend futures-based model's alternative projections of where the S&P 500's level would be for when investors focus on particular points of time in the future.

The behavior of stock prices is complex, but not difficult to sort out if you have the right framework for understanding why they behave as they do. Regardless, the one thing that will determine how they behave in the immediate future in the random onset of new information. Speaking of which, here is our summary of the previous week's newsflow of market-moving headlines, which provides a good potion of the context needed to understand what new information investors were absorbing during the most volatile week for markets in months.

Monday, 22 February 2021

• Signs and portents for the U.S. economy:
• Oil jumps almost 4% as output slow to recover from Texas storms
• Fed minion expects strong recovery:
• Fed's Kaplan sees U.S. economy growing at least 5% this year
• Bigger stimulus developing in the Eurozone:
• EU to decide on extending suspension of Stability Pact in coming weeks: official tells paper
• Euro zone borrowing costs tumble on ECB Lagarde comments
• ECB minion swears there is no risk of lasting inflation in the Eurozone:
• No risk of overheating in euro zone - ECB's Villeroy de Galhau
• Nasdaq, S&P 500 end lower as U.S. yields rise; Disney lifts Dow
• Ten-year Treasury yield catching up to S&P 500 dividend
• Explainer: U.S. Treasury's cash drawdown - and why markets care

Tuesday, 23 February 2021

• Signs and portents for the U.S. economy:
• U.S. manufacturers grapple with steel shortages, soaring prices
• U.S. consumer confidence improves as COVID-19 cases fall; house prices accelerate
• Oil settles mixed amid post-storm uncertainty
• U.S. bill rates risk going negative, but stimulus could change the course
• Analysis: Bubbles, bubbles bound for trouble?
• Analysis: Prices lurch higher as Home Depot, other importers battle surging cargo, commodity costs
• Fed minion speaks to Congress, sees rapid growth once virus-fear driven lockdowns are lifted, not afraid of inflation:
• Fed Chair Powell's prepared remarks to Congress, Feb. 23, 2021
• Fed's Powell: 2021 GDP growth could be in range of 6%
• Powell says economy still needs Fed support, pushes back on inflation worries
• Powell's Econ 101: Jobs not inflation. And forget about the money supply
• Is Fed Chair Powell 'cool' with more fiscal aid? Suddenly he won't say
• Inflation also developing in the Eurozone:
• More expensive services lead euro zone inflation rebound in January
• S&P 500, Dow close higher in late session turnaround
• Stocks rebound on Powell policy remarks, oil gains

Wednesday, 24 February 2021

• Signs and portents for the U.S. economy:
• U.S. retail sales expected to jump on vaccine rollout, pent-up demand in positive sign for economy
• Oil rises after data shows slump in U.S. output amid Texas freeze
• U.S. new home sales blow past expectations in January
• Fed minions face negative rates, need Congress approval to launch digital currency, see need for endless monetary stimulus, but think future looks bright:
• Analysis: As bond selloff gets real, policymakers face fresh headache
• Fed's Powell: Digital dollar may require some congressional approval
• Data-focused Powell paves way for era of extended loose Fed policy
• Fed's Brainard says U.S. economy far from employment, inflation goals
• Fed's Clarida says U.S. economic prospects have brightened
• Mixed signs of growth, recession in Eurozone:
• Strong exports and construction boost German economy in fourth quarter
• German economy to shrink some 1.5% in early 2021: DIW
• BOJ minions becoming concerned over endless monetary stimulus:
• Former BOJ executive calls for 'genuine' review of central bank stimulus
• Wall Street advances as Fed's Powell soothes inflation worries

Thursday, 25 February 2021

• Signs and portents for the U.S. economy:
• Oil mixed, U.S. crude hits highest since 2019 as refineries restart
• U.S. pending home sales decline in January
• U.S. labor market showing tentative signs of improvement; manufacturing strong
• White House says it does not expect to issue budget proposal in February
• Fed minions super optimistic rapidly rising interest rates is a good thing, want to keep easy money policies:
• Atlanta Fed's Bostic says not worried about rise in bond yields with rates still comparatively low
• "Euphoria" over pandemic's end may make recovery particularly strong - Bostic
• Bostic: Recovery in "rough patch" but optimistic for faster growth
• Fed's George says rise in long-term rates a sign of optimism
• Bullard: Jump in bond yields proper response to stronger growth, inflation outlook
• Bullard says "rosy outlook" no cause to begin discussing pullback of Fed support
• Quarles cautions pandemic stimulus could obscure risks for banks
• NY Fed's Williams: GDP growth this year could be strongest in decades
• Bigger trouble developing in the Eurozone:
• Euro zone corporate lending growth slows as monthly flows dry up
• Positive signs of post-coronavirus recession recovery:
• World trade bounces back to pre-coronavirus levels: CPB monitor
• ECB minion commits to keep Eurozone interest rates low indefinitely:
• ECB will fight big rise in real rates: Schnabel
• Wall Street ends sharply lower, tech selloff weighs as bond yields climb
• Instant View: U.S. stocks tank as Treasury yields surge
• Bond markets left smarting from worst rout in years as reflation goes global

Friday, 26 February 2021

• Signs and portents for the U.S. economy:
• U.S. consumer spending rebounds in January
• U.S. House on verge of approving Biden's $1.9 Trillion COVID-19 Aid Plan
• U.S. Senate referee says Democrats cannot include $15 minimum wage in COVID bill
• Bigger trouble with inflation developing all over:
• Bond markets left smarting from worst rout in years as reflation goes global
• Analysis: Global bond rout turns up the heat on central banks
• Analysis: Big moves and liquidity woes in a U.S. bond 'tantrum without the taper'
• Column: Tantrum without the taper
• Analysis: Investors jumping the gun as TIPS, futures flag early Fed tightening
• As yields creep up, BOJ's Kuroda calls for 'stably low' rates
• Bank of England's Haldane warns inflation "tiger" is prowling
• Positive post-coronavirus recovery signs in India, China, mixed signs in Japan:
• India's economy returns to growth after shrinking for two quarters
• China's economy could grow 8-9% this year from low base in 2020: central bank adviser
• Japan's January factory output rises for first time in three months, retail sales drop
• ECB minions standing by, seem okay with rising interest rates, but thinking about unleashing more QE:
• ECB still in wait-and-see mode as yields rise
• ECB's Schnabel says rise in nominal yields may be welcome
• Exclusive: ECB's Stournaras calls for increasing bond buying to calm markets
• Nasdaq finishes higher, tech stocks retrace some losses
• Stock markets hit by bond whiplash

Meanwhile, Barry Ritholtz lists the positives and negatives he found in the past week's economics and markets news.