Unexpectedly Intriguing!
10 January 2022

It didn't take long for investors to put the S&P 500 (Index: SPX) through its first Lévy flight event of 2022.

After having just focused their attention on the distant future quarter of 2022-Q4 to drive the index to record highs to close 2021, the S&P 500 retreated in the first week of 2022 as investors absorbed the new expectation the Fed will be much more aggressive in tapering its stimulus bond buys and in ramping up rate hikes than they had previously believed. With 2022-Q1 now the anticipated timing of the Fed's first rate hike, investors refocused their attention on the current quarter, sending the index to levels the dividend futures-based model indicated they would if they did focus on 2022-Q1.

Alternative Futures - S&P 500 - 2022Q1 - Standard Model (m=-2.5 from 16 June 2021) - Snapshot on 7 Jan 2022

The driving factor behind the shift in the time horizon for investors is the increased probility the Fed will initiate a quarter point rate hike by March 2022. The following snapshot of the CME Group's FedWatch tool's probabilities of changes in the Federal Funds Rate reflects the new anticipation the Federal Reserve will need to be much more aggressive to rein in the inflation President Biden's stimulus checks have fostered.

CME Group FedWatch Tool Probabilities of Federal Funds Rate Changing at Future FOMC Meeting Dates, Snapshot on 07 January 2022

In this 7 January 2022 snapshot, the CME FedWatch Tool indicates quarter point hikes will be on tap after the Fed's Federal Open Market Committee meets in March 2022, in June 2022 and in September 2022. After that point, the FedWatch Tool suggests a half point rate hike could follow in the fourth quarter of 2022, but there's a lot of time between now and then for this potential future to change.

What will cause it to change is the random onset of new information, where we flagged the following headlines from the first trading week of 2022 for their market-moving potential:

Monday, 3 January 2022
Tuesday, 4 January 2022
Wednesday, 5 January 2022
Thursday, 6 January 2022
Friday, 7 January 2022

We don’t anticipate investors having much reason to shift their forward-looking focus back out to the more distant time horizon of 2022-Q4 until later this year. We anticipate investors will mainly focus on 2022-Q1 and/or 2022-Q2 for the next several months until enough certainty develops to allow investors to shift their attention toward the later quarters of the year.

But that’s an easy prediction. And it’s also more than enough time for the expectations associated with more distant points of time in the future to change. Which is to say the future may look much different later in the year.

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