Unexpectedly Intriguing!
27 March 2023
Wall Street Stock prices up - Source: WikiMedia Commons

The S&P 500 (Index: SPX) climbed 1.4% from the previous week's close to wrap up the trading week ending Friday, 24 March 2023 at 3970.99.

During the week, dividend futures rebounded from the previous week's low for the quarter. However, the bigger story is that expectations took hold the Federal Reserve is done with rate hikes after hiking them by a quarter point on Wednesday, 22 March 2023 and will be swinging to cut rates instead in the weeks ahead.

The latest update to the alternative futures chart shows the S&P 500's trajectory continued persistently tracking below the redzone forecast range we established almost three months ago, which has now reached its end.

Alternative Futures - S&P 500 - 2023Q1 - Standard Model (m=+0.0 from 6 January 2023) - Snapshot on 24 Mar 2023

With the increased focus on how the Fed will adapt its monetary policies during 2023-Q2, the Fed's rate hike provides a valuable calibration point we can use to quantify the shift in the value of dividend futures-based model's multiplier. The model requires the multiplier's value be set according to empirical observations, where a first pass suggests it has shifted from 0.0 to +1.5 as a result of the interest rate hike-induced distress in the U.S. banking system. That new shift follows the multiplier having recently shifted from +2.0 to +0.0 in early January 2022.

The next chart sets up the new hypothesis test utilizing a multiplier of about +1.5 starting from 9 March 2023, coinciding with the development of the then-impending failure of Silicon Valley Bank.

Alternative Futures - S&P 500 - 2023Q1 - Standard Model (m=+1.5 from 9 March 2023) - Snapshot on 24 Mar 2023

With this shift in multiplier, we see the redzone forecast range adjust accordingly, as if we has made the assumption the multiplier, m, would shift from +0.0 to +1.5 on 9 March 2023 from the very beginning. This visual adjustment is an artifact of how we set up redzone forecast ranges, where we anchor one point in the past and the other in the future to allow them to dynamically adapt along with changes in future expectations.

Going forward, we're starting with the assumption that m = +1.5 and that investors are focusing on 2023-Q2 in setting their forward-looking focus. Ideally, we should see the trajectory of the S&P 500 track along within a few percent of the alternative future projection associated with 2023-Q2. In reality, we anticipate a higher level of volatility driven by the onset of new information.

Speaking of which, here are the past trading week's market moving headlines:

Monday, 20 March 2023
Tuesday, 21 March 2023
Wednesday, 22 March 2023
Thursday, 23 March 2023
Friday, 24 March 2023

After the Federal Reserve's quarter point rate hike on 22 March 2023, the CME Group's FedWatch Tool now anticipates the Fed has finished the series of rate hikes it began a year earlier. From the current Federal Funds Rate target range of 4.75-5.00%, the FedWatch tool predicts the Fed will be forced initiate a series of quarter point rate cuts at six weeks intervals starting after the FOMC meets on 26 July (2023-Q3) and continuing through December (2023-Q4). In 2024, the FedWatch tool projects at least one quarter point rate cut per quarter through September (2024-Q3), when the Federal Funds Rate target range will have fallen to 2.75-3.00%.

The Atlanta Fed's GDPNow tool's projection for real GDP growth in the first quarter of 2023 held steady at +3.2%. With the first calendar quarter of 2023 nearly over, the GDPNow indicator continues transitioning to look backward instead of forward. The Bureau of Economic Analysis' initial estimate of GDP in 2023-Q1 is scheduled to be released on 27 April 2023.

Image credit: WikiMedia Commons. Creative Commons: CC0 1.0 Universal (CC0 1.0) Public Domain Dedication.

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