Unexpectedly Intriguing!
01 March 2021

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.

Alternative Futures - S&P 500 - 2021Q1 - Standard Model (m=+1.5 from 22 September 2020) - Snapshot on 26 Feb 2021

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
Tuesday, 23 February 2021
Wednesday, 24 February 2021
Thursday, 25 February 2021
Friday, 26 February 2021

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

Labels: ,

About Political Calculations

Welcome to the blogosphere's toolchest! Here, unlike other blogs dedicated to analyzing current events, we create easy-to-use, simple tools to do the math related to them so you can get in on the action too! If you would like to learn more about these tools, or if you would like to contribute ideas to develop for this blog, please e-mail us at:

ironman at politicalcalculations.com

Thanks in advance!

Recent Posts

Stock Charts and News

Most Popular Posts
Quick Index

Site Data

This site is primarily powered by:

This page is powered by Blogger. Isn't yours?

CSS Validation

Valid CSS!

RSS Site Feed

AddThis Feed Button


The tools on this site are built using JavaScript. If you would like to learn more, one of the best free resources on the web is available at W3Schools.com.

Other Cool Resources

Blog Roll

Market Links

Useful Election Data
Charities We Support
Shopping Guides
Recommended Reading
Recently Shopped

Seeking Alpha Certified

Legal Disclaimer

Materials on this website are published by Political Calculations to provide visitors with free information and insights regarding the incentives created by the laws and policies described. However, this website is not designed for the purpose of providing legal, medical or financial advice to individuals. Visitors should not rely upon information on this website as a substitute for personal legal, medical or financial advice. While we make every effort to provide accurate website information, laws can change and inaccuracies happen despite our best efforts. If you have an individual problem, you should seek advice from a licensed professional in your state, i.e., by a competent authority with specialized knowledge who can apply it to the particular circumstances of your case.