Exciting New Territory for the S&P 500

The S&P 500 (Index: SPX) inched up to its highest close since the second week of June 2020, but is still slightly over 201 points shy of the record high of 3,386.15 it recorded on 19 February 2020. On the other hand, it has risen 947.64 points since hitting bottom at 2,237.40 back on 23 March 2020.

But at 3,185.04, it's high enough that we're thinking that investors may have altered their their anticipation for what to expect from the Federal Reserve's monetary policy in the past week, where the alternative futures chart suggests they may now be leaning toward expecting more in the way of expansionary monetary policies.

 

We see that change in the approximate value of the dividend futures-based model's amplification factor, m, which looks like it moved from a value of 1.5 toward a value of 1.0 in the last week. We think that change coincides with comments made by Fed officials on that day pledging more support for a recovery from the coronavirus recession.

Where we don't see any change is in the CME Group's FedWatch tool, which shows a 100% probability of the Fed maintaining its Federal Funds Rate in the zero bound range of 0-0.25% well into 2021. That expectation has been unchanged over the last several weeks.

Meanwhile, the Fed's combination of liquidity injections and lending to U.S. corporations has mitigated a collapse in expected future dividends that would have devasted pension funds and greatly amplified the economic damage from the coronavirus recession had the Fed not intervened to support the stock market. The expected future for the S&P 500's quarterly dividends per share has risen to their highest levels of the past several months, though at this point, that means the S&P 500's are now expected to bottom in 2020-Q4 and stabilize during 2021.

 

Here's the roundup of the week's major market-moving news headlines.

Monday, 6 July 2020

• Daily signs and portents for the U.S. economy:
  • Oil steady as hopeful economic data face spike in virus cases
  • U.S. pandemic aid program saved 51.1 million jobs, but wealthy and connected also benefited
  • U.S. service sector rebounds strongly in June
• Signs of rebound in China, Eurozone:
  • China demand optimism drives copper to five-month high
  • Eurozone retail sales in record rebound in May as lockdowns eased
  • Moderate rebound in German industry orders points to slow recovery
• Wall Street jumps on strong services sector, hopes of China recovery

Tuesday, 7 July 2020

• Daily signs and portents for the U.S. economy:
  • Oil steadies as economic data overshadows coronavirus worries
  • U.S. hiring vaults to record high in May; new COVID-19 cases set to limit gains
• Fed policymakers worry growth plateauing, pledge more support
  • Fed's Bostic: Business 'getting nervous again' as virus surges
  • Fed's Bostic says U.S. recovery may be 'leveling off': FT interview
  • Fed's Mester says full recovery a long way off, more fiscal help needed
  • Fed's Clarida says there is more the Fed can and will do
• Confusion reigns in Eurozone:
  • EU sees deeper recession, less steep rebound for eurozone
  • Europe's recession may be milder than feared, ECB's Schnabel says
• Bigger bailouts developing in Eurozone:
  • ECB's Costa calls for TARP-style bad debt fund to relieve banks
  • ECB may ask banks to withhold dividends for longer
• Wall Street drops after strong rally as COVID-19 cases mount

Wednesday, 8 July 2020

• Daily signs and portents for the U.S. economy:
  • Oil settles higher on improving U.S. gasoline demand
    • End of an era? Series of U.S. setbacks bodes ill for big oil, gas pipeline projects
  • U.S. may see 'some spots' of economic damage as states see coronavirus surge, Kudlow says
• Bigger trouble developing in China, Eurozone:
  • Chinese factories to face headwinds in the next phase of post-lockdown recovery
  • China's June passenger car sales down 6.5% year-on-year: CPCA
  • Some 83% of German firms with foreign exposure complain of collapsing revenues
• Bigger stimulus not developing in Eurozone?
  • Eurozone economy may have shrunk less than expected, says ECB's VP
  • Still much work needed for EU recovery fund deal, Michel says
• Fed minions ramping up support for economy, see mixed picture:
  • Boston Fed publishes initial listing of lenders accepting new customers under Main Street loan program
    • Fed's Rosengren says demand for Main Street loans expected to grow as U.S. economy grapples with virus
  • NY Fed's Singh says emergency facilities helped markets despite low usage
  • Fed officials suggest U.S. recovery may be stalling
  • Fed's Bullard sees most rehired in 90 days, pandemic controlled with masks
• Nasdaq ends at record high as Wall Street rises with tech shares

Thursday, 9 July 2020

• Daily signs and portents for the U.S. economy:
  • Oil falls $1/bbl as resurgent pandemic prompts worries about U.S. demand
  • Coronavirus records in Florida, Texas and California erode hopes of economic revival
  • U.S. recovery in limbo as retail traffic falls in virus hot spots
• Bigger stimulus developing in the U.S.:
  • U.S. Treasury chief supports more direct payments in next coronavirus aid bill
  • Pelosi confident U.S. Congress will produce strong coronavirus relief bill
• ECB minions pledging monetary support, but pushing hard for fiscal actions:
  • ECB will be as innovative as needed with policy tools, Villeroy says
  • EU reconstruction plan should lead to permanent fiscal stability mechanism, says ECB's de Cos
• Dow, S&P 500 end lower on fears over surging virus cases but Nasdaq hits record high

Friday, 10 July 2020

• Daily signs and portents for the U.S. economy:
  • Oil rises as International Energy Agency boosts demand forecast
  • Trump says he is not thinking about a 'Phase 2' U.S. - China trade deal
  • U.S. producer prices unexpectedly fall; underlying inflation stabilizing
  • U.S. sets one-day record with more than 60,500 COVID cases; Americans divided
    • Fed's Kaplan says mask-wearing is key to economic growth
• Bigger trouble developing in Japan, bigger stimulus developing in China:
  • Japan's economy to shrink at fastest pace in decades this fiscal year due to pandemic: Reuters poll
  • China's policy steps to support economy gain results: central bank official
• Fed making odd corporate bond buys:
  • Fed adds Apple, Anheuser-Busch, Expedia to its bond holdings
• Wall Street climbs as Gilead data offsets virus fears; Nasdaq hits another record high close

Over at The Big Picture, Barry Ritholtz divides the markets and economics news of the week into short, succinct lists of positives and negatives.

On a final note, we're thinking we need to take a broader view of the impact of the Fed's monetary policies in continuing to pay attention to the changing value of the amplification factor in the dividend futures-based model. We had been thinking that when it turned negative as the Fed flooded the market with liquidity during the last several months, it was indication investors were expecting negative interest rates.

To be sure, they were, but the Fed doesn't need to set its Federal Funds Rate to be negative to achieve that effect. During the so-called "Great Recession", the Federal Reserve used its quantitative easing policies to achieve the effect of negative rates (as measured by Jing Cynthia Wu and Fan Dora Xia's shadow federal funds rate), without actually setting negative rates.

The difference between then and now is the Fed has implemented considerably more robust interventions which have transformed the amplification factor from being effectively constant to now be a variable, which means we will have to pay a lot more attention to what the Fed's minions are saying and doing.

Not that we weren't before given their role in setting the future time horizon of investors via their policies of forward guidance, but now their influence goes far beyond that, which the headlines of the past week make clear.

It is an exciting time. We are in new territory. What can possibly go wrong in the Fed's new world?