03 April 2023

The S&P 500 Rises as Inflation Cools

Wall Street Exit Sign by Kidfly182 via Wikimedia Commons- https://commons.wikimedia.org/wiki/File:Wall_Street_Mosaic_Tile.jpg

The S&P 500 (Index: SPX) closed out the first quarter of 2023 on a high note, rising 1.4% on Friday, 31 March 2023 to end the week up by 3.5% from its previous week's close. The index concluded the quarter at a level of 4,109.31.

With the new assumption of the amplification multiplier incorporated into the dividend futures-based model, the latest update to the alternative futures chart indicates the trajectory of the S&P 500 is consistent with investors focusing their attention on the current quarter of 2023-Q2.

That makes sense because this quarter is when investors expect the Federal Reserve may significantly alter its future course. It will almost certainly contain the peak of the Fed's year-long series of rate hikes, and it may include the Fed's first rate cuts since the arrival of the Coronavirus Pandemic in 2020. Here's the chart:

Alternative Futures - S&P 500 - 2023Q1 - Standard Model (m=+1.5 from 9 March 2023) - Snapshot on 31 Mar 2023

Reports of cooling inflation as measured by Personal Consumption Expenditures (PCE) on Friday, 31 March 2023 were credited with the market's positive reaction. Here are the week's market moving headlines:

Monday, 27 March 2023
Tuesday, 28 March 2023
Wednesday, 29 March 2023
Thursday, 30 March 2023
Friday, 31 March 2023

The CME Group's FedWatch Tool has put nearly even odds of the Fed hiking the Federal Funds Rate by a quarter point to a target range of 5.00-5.25% at its upcoming meeting on 3 May (2023-Q2). After that, the FedWatch tool anticipates a series of quarter point rate cuts starting from July (2023-Q3) and continuing through December (2023-Q4), with the Federal Funds Rate declining to a target range of 4.25-4.50%. In 2024, the FedWatch tool foresees more rate cuts, with the Federal Funds Rate reaching a target range of 3.25-3.50% in September (2024-Q3).

The Atlanta Fed's GDPNow tool's projection for real GDP growth in the first quarter of 2023 dropped to +2.5% from the previous week's estimate of +3.2%. With the end of the first calendar quarter of 2023, the GDP indicator is now fully looking backward instead of forward.

Next week, we'll roll out a new chart showing how the dividend futures model anticipates the future for the S&P 500 will look like during 2023-Q2. But we're happy to spoil it by noting it will look a lot like 2023-Q1 given current assumptions and expectations!

Image credit: Wikimedia Commons. Wall Street Exit Sign by Kidfly182 Wall Street Mosaic Tile by Kidfly182. Creative Commons Attribution-Share Alike 4.0 International.