The final week of July 2022 came with two major news events shaping S&P 500 (SPX) investor expectations for the future. Wednesday, 27 July 2022, saw the U.S. Federal Reserve follow through with its second 0.75% rate hike of the year, while Thursday, 28 July 2022, saw the U.S. Bureau of Economic Analysis report that real economic growth in the U.S. was negative for the second quarter.
The Fed hiking rates into an already weakened economy increases the likelihood the Fed's efforts to fight inflation by hiking short-term interest rates will more fully put the U.S. economy into recession. That outcome means the Fed's plan to continue hiking rates until inflation is under control is likely to come to a screeching halt sooner than previously expected. More importantly, it pushes up the timetable for when the Federal Reserve will have to swing into reverse and begin cutting rates instead. The odds that will happen as soon as the first quarter of 2023 rose substantially as investors assessed the impact of these major market-moving news events.
In terms of the latest update to the dividend futures-based model's alternative futures chart, these changes prompted investors to shift their attention from the current quarter of 2022-Q3 outward to the more distant future of 2023-Q1, sending stock prices upward in the process. That change represents the ninth Lévy flight event for the S&P 500 index in 2022.
Meanwhile, it was a jam-packed news week for market-moving headlines, of which the Fed's rate hike and the second consecutive negative real GDP report were the biggest events:
After the Fed boosted the Federal Funds Rate by 0.75% to its new target range between 2.25% and 2.50%, the CME Group's FedWatch Tool projects a half-point rate hike in September (2022-Q3). That's followed by two quarter-point rate hikes in November and December (2022-Q4), with the Federal Funds Rate topping out in a target range between 3.25% and 3.50%. In 2023, the tool anticipates the Fed will be forced to begin cutting rates beginning in May (2023-Q2) as the U.S. central bank responds to more fully developed recessionary conditions, with a high probability of moving earlier into March (2023-Q1). That latter development provides a strong motive for investors to start focusing on 2023-Q1 in setting today's stock prices, which is what the dividend futures-based model indicates happened in this past week.
The Atlanta Fed's GDPNow tool's first projection for real GDP of 2.1% in the third quarter of 2022 suggests the U.S. economy will rebound from its second quarter of negative growth in 2022. Then again, that's a lot like how 2022-Q2 started.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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