The S&P 500 behaved more as I expected that it would during the first full week of December 2017, with stock prices dipping as investors shifted their forward-looking focus to 2018-Q1 in setting current day stock prices.
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But ended up on Friday, 8 December 2017 at a level that would at first appear to be more consistent with their being focused on 2018-Q2. The reason for that has a lot to do with the positive jobs report that came out on Friday, 8 December 2017, which had the official unemployment rate hold steady from the previous month at 4.1%, but which is down a half percent from November 2016. The report was stronger than expected, which appeared to clear the way for the Fed to not just announce that they will hike U.S. short-term interest rates this Wednesday, 13 December 2017, but up to three more times in 2018.
The CME Group's FedWatch tool is reflecting that assessment, where after a 100% probability that the Fed will hike rates on this Wednesday (with a 90.2% chance they'll hike them to a target range of 1.25%-1.50%, and a 9.8% chance they'll hike them even higher to the 1.50%-1.75% range), the Fed Funds Rate futures suggest additional hikes in at least the first quarter of 2018 (2018-Q1) and again in the third quarter of 2018 (2018-Q3).
| Probabilities for Target Federal Funds Rate at Selected Upcoming Fed Meeting Dates (CME FedWatch on 8 December 2017) | ||||||
|---|---|---|---|---|---|---|
| FOMC Meeting Date | Current | |||||
| 100-125 bps | 125-150 bps | 150-175 bps | 175-200 bps | 200-225 bps | 225-250 bps | |
| 13-Dec-2017 (2017-Q4) | 0.0% | 90.2% | 9.8% | 0.0% | 0.0% | 0.0% |
| 12-Mar-2018 (2018-Q1) | 0.0% | 38.6% | 54.8% | 6.5% | 0.1% | 0.0% |
| 13-Jun-2018 (2018-Q2) | 0.0% | 17.9% | 44.7% | 31.8% | 5.3% | 0.3% |
| 26-Sep-2018 (2018-Q3) | 0.0% | 10.3% | 32.8% | 36.5% | 16.9% | 3.2% |
Since no hike in the Federal Funds Rate would appear to be anticipated for 2018-Q2 at this time, investors have little reason to focus much of their forward-looking attention on this future quarter, which is why we think that they are now primarily focusing on 2018-Q1, where the level of the S&P 500 is still falling within the range that we would anticipate they would be in that situation.
In any case, this upcoming week will be a big one for markets as the Fed acts and also because we'll start getting our first look at what the future holds for dividends through the end of 2018. In the meantime, here are the market-moving headlines that caught our attention during Week 1 of December 2017.
Monday, 4 December 2017
- Oil eases 1 percent on profit-taking as U.S. output eyed
- Stocks fade after record run as U.S. tax bill digested
- Dow hits record as investors bet on tax cuts
Tuesday, 5 December 2017
- Oil rises in anticipation of another U.S. crude drawdown
- Tech rally burns out, leaves Wall Street lower
Wednesday, 6 December 2017
- Oil settles at two-week low on surprise U.S. fuel stock rise
- Tech recovers, but not enough to push Wall St. higher
Thursday, 7 December 2017
- Oil rises over 1 percent on threatened Nigeria strike, short covering
- QE Lives!: U.S. Fed buys $7.8 billion of mortgage bonds, sells none
- QE Is Dead!: The Fed’s QE-Unwind is Really Happening
- Wall Street rising: Facebook, Alphabet, Lululemon gain
Friday, 8 December 2017
- Oil rises nearly 2 percent on China demand, but weekly losses loom
- Stock Market Winners: Wall Street closes higher after payrolls report
- Stock Market Losers: Tax-loss selling to pressure 2017's losers in December
The invaluable Barry Ritholtz provides an overview of the positives and negatives for the U.S. economy and markets in the first full week of December 2017.
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