Breaking the Chain of Boredom with the S&P 500 in Week 2 of August 2017

The U.S. stock market has been on what we've described as a boring trend over the last several weeks, even as it has hovered near records highs.

That chain of boredom was broken with the S&P 500 in Week 2 of August 2017, when stock prices hovered at its high level just a few days longer than our dividend futures-based model suggested it could, where it found itself in a scenario similar to that of Wile E Coyote after having run off the edge of a desert cliff, hanging in open space until he looks down....

Metaphorically speaking, and a behavioral finance standpoint, that's pretty much exactly what happened on Thursday, 10 August 2017.

 

Fortunately, stock prices didn't have far to fall. We can however confirm that investors would appear to have locked their focus upon the distant future quarter of 2018-Q2, which matches not only what our dividend futures model is telling us, it also matches what the CME Group's FedWatch tool is telling us. Mike Shedlock has snapshots of what the FedWatch tool is communicating, but here is the short summary of the probabilities for what investors are expecting for the timing of the Fed's next change in short term U.S. interest rates after last week.

• 2017-Q3 (20 September 2017)
  • Decrease to 75-100 bps: 4.1%
  • Unchanged at 100-125 bps: 95.9%
• 2017-Q4 (13 December 2017)
  • Decrease to 75-100 bps: 2.6%
  • Unchanged at 100-125 bps: 61.5%
  • Increase to 125-150 bps: 35.2%
  • Increase to 150-175 bps: 0.7%
• 2018-Q1 (21 March 2018)
  • Decrease to 75-100 bps: 2.2%
  • Unchanged at 100-125 bps: 52.7%
  • Increase to 125-150 bps: 39.1%
  • Increase to 150-175 bps: 5.9%
  • Increase to 175-200 bps: 0.2%
• 2018-Q2 (13 June 2018) (Now Most Likely Quarter for Change in Federal Funds Rate)
  • Decrease to 75-100 bps: 1.7%
  • Unchanged at 100-125 bps: 41.3%
  • Increase to 125-150 bps: 41.8%
  • Increase to 150-175 bps: 13.5%
  • Increase to 175-200 bps: 1.7%
  • Increase to 200-225 bps: 0.1%

2018-Q2 is when the combined odds of the Fed hiking its Federal Funds Rate above its current range of 100-125 basis points (1.00 to 1.25%) finally exceeds 50%, where that action is not expected until the Fed's 13 June 2018 meeting.

The headlines for the week in the markets had a good amount of noise in them, particularly related to North Korea, which really says more about the media's interests than what's motivating the markets.

Monday, 7 August 2017

• No need for Fed to raise interest rates in near term: Bullard
• Oil slides as output rises at Libya's largest oil field
• Wall Street ends higher as Dow edges to latest record

Tuesday, 8 August 2017

• Wall Street swings lower after Trump warns North Korea

Wednesday, 9 August 2017

• Fed's Evans says reasonable to begin trimming balance sheet next month
• Oil inches higher after data points to declining U.S. inventories
• S&P closes barely lower despite North Korea tensions

Thursday, 10 August 2017

• Oil gains as inventory overhang erodes and Saudi cuts exports
• Dudley reinforces Fed expectation of U.S. inflation rebound
• Dow, S&P 500, Nasdaq log worst session since May, close lower for 3rd straight day
  • Wall Street reels under North Korea tensions, tepid retail earnings
  • One View of S&P 500 Retreat Is Its Stocks Catching Up With Junk

Friday, 11 August 2017

• Oil prices up amidst higher global demand, Nigeria instability
• Fed to soon shed bonds, should hold off rate hikes: Kaplan
  • Fed key rate closer to 'neutral,' should be patient on inflation: Kaplan
  • Weak CPI data another reason to pause rate hikes: Fed's Kashkari
• Wall Street rises on Fed bets but North Korea mutes gains

Elsewhere, Barry Ritholtz summarized the positives and negatives for the U.S. economy and markets for the week that was.