Unexpectedly Intriguing!
03 October 2022

The final week of September 2022 saw the S&P 500 continue the swoon that began on Tuesday, 13 September 2022. Measured from its closing value of 4,110.41 on Monday, 12 September 2022, the index has dropped by 524.79 points to end 2022-Q3 at 3,585.62. That level is now 25.2% below the S&P 500's all-time peak of 4,796.56 recorded on 3 January 2022.

Which is to say that it has only taken 14 trading days from when the August 2022 inflation report was released for the S&P 500 to rack up the equivalent of 43% of its total loss to date during 2022.

We've rolled the S&P 500 alternative futures chart forward to show 2022-Q4. In doing so, we've also included enough of September 2022 (2022-Q3) to show the aftermath of the regime change that took hold in the market after 12 September 2022.

Alternative Futures - S&P 500 - 2022Q4 - Standard Model (m=+2.0 from 13 September 2022) - Snapshot on 30 Sep 2022

In the previous edition of the S&P 500 chaos series, we were concerned the actual trajectory of the index was following the projected trajectory for investors focusing on 2023-Q2 too closely. That's because we're also in a period where the dividend futures-based model's projections of the potential futures for the index are being impacted by the echoes of the past volatility of stock prices. Since the model uses historic stock prices as the base reference points for its projections of the future, that echo effect means the model should be less accurate at this time.

This week's update confirms looks more like we would expect. We've added a redzone forecast showing where we would expect the actual trajectory of the S&P 500 to be outside that noise. We're showing the redzone forecast range as the typical plus-or-minus three percent we would expect in a typical market environment. Using it as a reference, we find the actual trajectory of index is tracking within a couple of percentage points below it.

The redzone forecast range represents what we would call the signal, it's where we would expect the index to be under ordinary conditions for investors. The gap between the actual trajectory and the redzone forecast range is what we would call noise. This difference represents the effects of speculation caused in part by the higher level of volatility unleashed in the new market regime.

We think investors are setting stock prices more negatively in the new market regime because of their developing expectations for how high the Federal Reserve will ultimately set interest rates. They are expected to peak in 2023-Q2, which is why that distant future quarter has become the primary focus for investors.

That's supported by the context provided by the market-moving headlines of the week that was. Here are the headlines we followed during the final trading week of September 2022.

Monday, 26 September 2022
Tuesday, 27 September 2022
Wednesday, 28 September 2022
Thursday, 29 September 2022
Friday, 30 September 2022

The CME Group's FedWatch Tool still projects a three-quarter point rate hike in early November followed by a half point rate hike in December (2022-Q4). In 2023, investors anticipate a quarter point rate hike in March (2023-Q1), setting to top for the Federal Funds Rate's target range at 4.75-5.00%. After that peak, the FedWatch tool indicates the Fed will be forced to swing into reverse, with a quarter point rate cut projected as early as May 2023 (2023-Q2).

The Atlanta Fed's GDPNow tool's projection for real GDP growth in the just-ended calendar quarter of 2022-Q3 rocketed up from +0.3% to +2.4% based on new data pointing to higher consumer spending and more private investment. The Bureau of Economic Analysis will provide its first official estimate of real GDP growth in 2022-Q3 at the end of October 2022.

Looking backward, the BEA's annual GDP revision confirmed the U.S. economy experienced a technical recession in the first two quarters of 2022 with two consecutive quarters of negative real growth.

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