Unexpectedly Intriguing!
13 March 2023
Man in Black Crew Neck T-Shirt by Usman Yousaf via Unsplash - https://unsplash.com/photos/8dvyPDYa35Q

Investors in the S&P 500 (Index: SPX) couldn't catch a break during the trading week ending on 10 March 2023.

The index was first rocked on Tuesday, 7 March 2023 by by Federal Reserve Chair Jerome Powell's testimony signaling bigger rate hikes are coming. They were rocked again later in the week by news of the second largest bank failure in U.S. history.

For the week, the S&P 500 dropped a little over 4.5% to close out the week at 3861.59. The index is 19.5% below its record high close of 3 January 2022.

Investors' response to these events knocked the S&P 500's trajectory below the redzone forecast range on the latest update for the alternative futures chart.

Alternative Futures - S&P 500 - 2023Q1 - Standard Model (m=+2.0 from 13 September 2022) - Snapshot on 10 Mar 2023

At this time, it's premature to tell if the dividend futures-based model's multiplier has shifted again. The index' trajectory would need to remain persistently below the model's currently projected trajectories to make that call and, right now, investors are dealing with more questions than answers.

The biggest question investors are considering involves the risk of additional bank failures that may be triggered in response to the Fed's rate hikes. If new information verifies those risks are low, what we're seeing now is likely a short term noise event and we should see the S&P 500 rebound to the model's projected levels. If new information says otherwise, we may have to wait until after the dust clears to find out how the multiplier may have shifted.

Speaking of new information, here are the past week's market-moving headlines:

Monday, 6 March 2023
Tuesday, 7 March 2023
Wednesday, 8 March 2023
Thursday, 9 March 2023
Friday, 10 March 2023

The CME Group's FedWatch Tool shows an explosive change in expectations this week. While a quarter point rate hike appears still on tap for the Fed's 22 March (2023-Q1) meeting, that would be followed by a half point rate hike on 3 May (2023-Q2) to reach a target range of 5.25-5.50%. After that, the tool's projections of the Federal Funds Rate’s future goes somewhat haywire until 2024, when a quarter point rate cut appears on tap in March (2024-Q1).

On the GDP front, the Atlanta Fed's GDPNow tool's projection for real GDP growth in the first quarter of 2023 rose to +2.6% from last week’s +2.3% estimate.

Based on that last data point, you might think there would not be any bank failures taking place, yet here we are. Stay tuned!

Image credit: Photo by Usman Yousaf on Unsplash.

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