Daily Volatility Drives The S&P 500 In Week 1 Of May 2018

The S&P 500 (Index: INX) saw some major intraday swings during the first week of May 2018, with the combination of Thursday, May 3, 2018, and Friday, May 4, 2018, combining to take the index on the wildest ride of the week.

Tracking each day's closing value of the S&P 500, what we find is that the level of the S&P 500 is consistent with investors continuing to split their attention between the current quarter of 2018-Q2 and the more distant future quarter of 2019-Q1, although slightly favoring the current quarter during Week 1 of May 2018.

That makes a lot of sense in the context of the news of the past week, where we're nearing the end of earnings reporting season taking place during 2018-Q2, so investors are continuing to keep a good portion of their forward-looking attention on the current quarter. Here are the market-moving headlines from the week that was....

Monday, April 30, 2018

• Oil gains after Netanyahu says Iran lied after signing nuclear deal
• Wall Street slides as healthcare drags but manages monthly gain

Tuesday, May 1, 2018

• Oil prices stumble, but Iran sanction fears limit losses
• Fed likely to keep rates steady; investors bet on June hike
• Wall Street rises on optimism on NAFTA deal and China trade

Wednesday, May 2, 2018

• Oil gains slightly after Fed sees economy growing at a 'moderate rate'
• Fed leaves interest rates unchanged, says inflation near goal
• Wall Street loses gains from Fed decision on China trade worries
  • Key sticking points in the U.S.-China trade dispute

Thursday, May 3, 2018

• Oil up on OPEC output cuts, worries about Iran sanctions
  • Boom in West Texas oil patch lifts wages, prices
• Trade Wars:
  • China to suspend checks on U.S. scrap metal shipments, halting imports
  • U.S. asks China to reduce trade imbalance immediately: WSJ reporter on Twitter
  • China offers to increase U.S. imports, cut tariffs on some products: sources
  • U.S., China commit to solve trade dispute through dialogue: Xinhua
• S&P drops as weak earnings offset strong economic data

Friday, May 4, 2018

• Oil hits highest since Nov. 2014 as Iran tensions mount
• Fed minions run wild in all directions:
  • Fed officials keep open mind on rate hikes, show little concern on inflation
  • Fed's Bostic says he's open to four rate hikes, or two
  • Fed's Kaplan says he sees wage pressures ahead
  • Fed's Williams: I don't see any rapid increase in inflation coming
  • Fed's Dudley sees U.S. economy on solid path, inflation near Fed's goal
  • Change in policy: Fed's Quarles says Fed does not target stock-market values
• Wall St. rallies as inflation fears ebb; Apple hits record high

Elsewhere, Barry Ritholtz found that the number of positives outweighed the negatives for the U.S. economy and markets during the first week of May 2018.

The other big factor of the week was the latest statement of the Federal Reserve's Open Market Committee, which all but guaranteed that it will next hike short-term interest rates in the U.S. at its June 2018 meeting. At the same time, investors are expecting at least one more rate hike in 2018, currently expected in 2018-Q3, as indicated by the CME Group's Federal Funds Rate futures.

Probabilities for Target Federal Funds Rate at Selected Upcoming Fed Meeting Dates (CME FedWatch on May 4, 2018)
FOMC Meeting Date	Current
	150-175 bps	175-200 bps	200-225 bps	225-250 bps	250-275 bps	275-300 bps
13-Jun-2018 (2018-Q2)	0.0%	100.0%	0.0%	0.0%	0.0%	0.0%
26-Sep-2018 (2018-Q3)	0.0%	26.3%	69.4%	4.3%	0.0%	0.0%
19-Dec-2018 (2018-Q4)	0.0%	12.1%	45.1%	37.7%	4.9%	0.2%

Click to enlarge

Though the CME Group's FedWatch tool isn't tracking it yet, we believe that investors are also anticipating that the Fed will once again raise the Federal Funds Rate during 2019-Q1, although with more uncertainty than they've indicated for the rate hikes that they are currently expecting in 2018. At the very least, that hypothesis offers a plausible reason for why 2019-Q1 would appear to be holding a considerable share of the current day focus of investors. Combined with covering the end-of-year market action for 2018 (since the futures contracts for 2018-Q4 will expire on Friday, December 21, 2018), we think it is likely that investors will focus at least a portion of their forward-looking attention on this quarter all through the rest of 2018.

Unless, of course, something happens to prompt them to shift their attention more fully to a different point of time in the future. As for what new information might cause that kind of shift, and when it might happen, your guess is as good as ours!