Unexpectedly Intriguing!
09 May 2022

We had a lot of fun watching the S&P 500 (Index: SPX) during the first week of May 2022. In case you missed it, the index swung through relatively rare 3%+ changes in its daily value.

And all of it was well telegraphed! Or rather, it was consistent with how the dividend futures-based model says the index would act given the new information investors have had to absorb in recent weeks. Here's a quick recap of our relevant coverage:

That last post contains updates addressing the specific causes of last week's wild market action, which added two more Lévy flight events to 2022's tally! Here's how they look on the latest update to the alternative futures spaghetti forecast chart:

Alternative Futures - S&P 500 - 2022Q2 - Standard Model (m=-2.5 from 16 June 2021) - Snapshot on 6 May 2022

Through Friday, 6 May 2022, we find investors are mainly focusing on the current quarter of 2022-Q2 in setting current day stock prices. Investors are betting the Fed will be compelled to hike interest rates by a bigger amount before the end of the quarter than they've been willing to publicly commit, completely reversing the expectation the Fed set on Wednesday, 4 May 2022 that 2022-Q2 would not see such a larger hike.

If you've been following the S&P 500 chaos series, you already know the importance of following the random onset of new, market-moving information. Although we've discussed the specific triggers for last week's market volatility via updates to last Monday's regular entry to the series, here's a more comprehensive picture of what was new and noteworthy during the week that was.

Monday, 2 May 2022
Tuesday, 3 May 2022
Wednesday, 4 May 2022
Thursday, 5 May 2022
Friday, 6 May 2022

The CME Group's FedWatch Tool projects the Fed will hike rates by three-quarters of a point in June (2022-Q2) and by another half point in July (2022-Q3), followed by a quarter point hike in September (2022-Q3). The prospects for a larger-than-half-point rate hike in June is why investors are now mainly focusing their attention on 2022-Q2 in setting current day stock prices.

The Atlanta Fed's GDPNow tool's is forecasting 2022-Q2 will rebound with a positive 2.3% real growth rate following 2022-Q1's negative growth.

Update 9 May 2022

Another exciting day for the S&P 500, which dropped more than three percent again! But as you'll see, that drop moved the level of the index right toward the middle of the redzone forecast range associated with investors focusing on the current quarter of 2022-Q2:

Alternative Futures - S&P 500 - 2022Q2 - Standard Model (m=-2.5 from 16 June 2021) - Snapshot on 9 May 2022

Big movement, but not a new Lévy flight because it is really a continuation of 2022's fifth event.

At this level, provided investors maintain their forward-looking focus on 2022-Q2, much of the wild swings should become relatively tempered. As you can see from the projected alternative future trajectory corresponding to this time horizon, there could still be significant declines ahead of up to 200-300 points, but that would come without the big upward movements associated with a new Lévy flight event.

Now, here's the catch. There's only a finite amount of time investors can maintain their focus on 2022-Q2. As the current quarter, the clock is already ticking down on it, which means investors will be forced to shift their attention to a different point of time in the future at some point on or before the third Friday of June 2022. That potentially forced shift of focus will trigger a new Lévy flight event. It's just a question of when, with its magnitude determined according to which other quarter investors might shift their attention and what the associated expectations for dividend growth are for that future quarter at the time when it happens.

Looking forward, the big market-moving news event for this week will likely come on Wednesday, 11 May 2022 when the next official report on inflation comes out. That will be early in the day, so we shouldn't have long to wait to find out what kind of impact it will have, especially if the actual figure reported for April 2022 is significantly different from what is expected going into the trading day.

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