Although the poorly laid plans of the TSA interfered with our usual posting schedule this week, we're fortunate in that recent developments in the market are giving us something far more interesting to write about today that what we might otherwise have discussed this past Monday.
Picking up on the market's action from last Friday, 13th May, 2016 through Tuesday, 17th May, 2016, it would appear that investors are shifting their focus away from the more distant future represented by 2016-Q4 toward the nearer-term future of 2016-Q3. You can see the small magnitude shift take place in the following chart over the last several days.
With the relatively tight compression of the alternative futures that stock prices might take dependent upon how far forward investors are collectively looking into the future, this particular Lévy flight in the trajectory of the S&P 500 (NYSEARCA:SPY) is almost indistinguishable from noise.
But we might get a bigger, more volatile response if certain Fed officials get their way and if the U.S. economy is able to show additional signs of strength, which the Fed would take as a green light for hiking short-term interest rates sooner rather than later as investors had previously believed. You can see the news that moved investors to shift their forward-looking focus to the nearer term in the headlines of note that we recorded over the past seven trading days, spanning all of week 2 of May 2016 and the first part of week 3...
- 9th May, 2016
- Fed's Kashkari says current U.S. interest rates 'about right' - not a voting member of the FOMC, but a vote for the status quo. Coinciding, of course, with investors keeping their focus on 2016-Q4, where it has been for much of the current quarter of 2016-Q2.
- Wall St. little changed as health offsets commodities - also not surprising.
- 10th May, 2016
- U.S. economy seen expanding 2.2 percent in second quarter: Atlanta Fed - the first taste of better-than-expected news for the U.S. economy.
- Stocks, oil surge as yen falls back again - which provided a very short-term boost for U.S. stock prices, before investors started considering what better-than-expected news would mean for the Fed's rate hiking plans.
- 11th May, 2016
- Oil jumps on first U.S. drawdown since March; Brent up 4 percent.
- U.S. dollar falls for first time after six-day rally.
- Wall Street slumps as Disney and Macy's slam consumer shares - the S&P 500 ended down from the previous day, but up from the day before that, as the market basically continued moving sideways as it has through much of 2016-Q2.
- 12th May, 2016 - This is the day when hawkish Fed officials really began to get to work in attempting to direct the attention of investors to the nearer-term future, which they did by indicating that they want a rate hike much sooner than investors have been expecting.
- U.S. economic uncertainty should not 'paralyze' Fed: Mester
- Fed will need to hike if second-quarter data points to stronger economy: Fed's Rosengren
- Fed's George says interest rates are too low
- Fed's Yellen says won't completely rule out negative rates
- Wall Street mixed as Apple tumbles to two-year low
- DoubleLine's Gundlach sees 'some rebellion' from Fed hawks
- 13th May, 2016 - And the hits just kept on coming!
- 16th May, 2016
- Fed's Lacker says June hike should be on the agenda - Lacker would be the fifth Fed official calling for a sooner rate hike.
- Oil hits six-month highs on supply outages, Goldman forecast
- Apple, energy shares shine as Wall Street rallies
- 17th May, 2016
- Wall Street lower as strong data raises chances of rate hike
- Fed's Kaplan's sees U.S. rate hike in 'not too distant future'
- Fed officials say 2-3 U.S. rate hikes possible this year - the "Fed officials" in the story are Atlanta Fed President Dennis Lockhart and San Francisco Fed President John Williams. Lockhart would be the seventh Fed official in the last week calling for a short-term interest rate hike to happen sooner.
Why, it's as if the Fed's minions are working overtime to set investor expectations! At least until they might get mugged by a different reality...
If the Fed's June 2016 meeting becomes a "live" meeting for implementing a rate hike, U.S. stock prices can be expected to converge with the trajectory our dividend futures-based model is projecting for 2016-Q2, which would mean the S&P 500 would fall from its present level. Potentially by as much as 200-240 points by the time the meeting concludes, given the current expectations for future dividends.
But if the Fed is prompted to back off its rate hike plans, the S&P 500 would only be likely to move sideways from where it is now, plus or minus three percent. At least, in the absence of a noise event that might prompt stock prices to deviate from our futures-based model's projected trajectories.