The S&P 500 Enters New Phase of Volatility

As expected, the S&P 500 (Index: SPX) continues to experience an impressive amount of volatility on a day-to-day basis.

Since we've been appending updated bits of analysis to our previous S&P 500 chaos posting during each day of the past week, we're going to focus this new edition on what happened on Friday, 6 March 2020, after we animate all the moves that took place since the close of trading on Friday, 28 February 2020 and quickly summarize the week that was. If you're accessing this article on a site that republishes our RSS news feed, please click through to our site to access the animation:

 

Each of the large swings in stock prices during the previous week coincided with major swings in how far into the future investors were focusing their attention, as changing expectations for the size and timing of interest rate cuts by the U.S. Federal Reserve led investors to alter their forward-looking focus back and forth between 2020-Q2 and 2020-Q4 from Friday, 28 February 2020 through Thursday, 5 March 2020. The following animated image captures those changes during the week ending on Friday, 6 March 2020, where the thing we want to point out is how little changed those expectations were between Thursday, 5 March 2020 and Friday, 6 March 2020.

 

On Friday, 6 March 2020, the dividend futures-based model indicated that investors shifted their attention more toward 2020-Q2, but unlike the previous days in the week, that change was unaccompanied by a change in the probabilities of the size and timing of how the Fed will change the Federal Funds Rate.

The big thing that changed on Friday, 6 March 2020 were the expectations for future dividends, which saw declines in the amount of cash dividends projected to be paid in upcoming future quarters from 2020-Q2 through 2020-Q4. In the following chart, we've animated the daily closing values indicated by the CME Group's futures for S&P 500 quarterly dividends for the future quarters of 2020-Q1 (which may still be in some flux until the dividend futures contracts for the quarter expire on the third Friday of March) through 2020-Q4, for each trading day from Friday, 28 February 2020 through Friday, 6 March 2020.

 

From Friday, 28 February 2020 through Thursday, 5 March 2020, the day-to-day changes in the S&P 500's expected future quarterly dividends is largely consistent with day-to-day noise in these futures. On Friday, 6 March 2020, we see significant decreases in the amount of dividends expected to be paid out in the future quarters of 2020-Q2 through 2020-Q4, which adds a new, downward force to affect stock prices.

This so far speculative change will work to concentrate investor focus on 2020-Q2 since this will be the period in which companies affected by the developing global economic situation resulting from China's coronavirus breakout will begin announcing changes in their business outlooks and their future dividend payouts.

Regardless, the S&P 500 has now entered into a new phase of its current period of volatility, where changes in expected future dividends, the fundamental driver of stock prices, will affect changes in stock prices.

Speaking of which, here is a more comprehensive listing of the past week's market-moving headlines than what we've previously presented in our daily appendices:

Monday, 2 March 2020

• Oil up over 4% as hopes of OPEC cut, stimulus counter virus gloom
• Bigger trouble developing all over:
  • Coronavirus hits global factories; chances of monetary policy easing rise
  • Take Five: The virus data fog
  • China's factories at risk of double whammy as coronavirus hits South Korea, Japan
  • U.S. manufacturing sector stalls as coronavirus hits supply chains
• Bigger stimulus under development:
  • Trump presses U.S. Federal Reserve to cut rates
  • ECB can do more if needed, but we're not there yet: Villeroy
  • Big central banks discussing coronavirus-related volatility: ECB
    • ECB should not have to act on every shock: Wunsch
    • ECB ready to act as needed on coronavirus: de Guindos
  • IMF, World Bank say ready to address economic challenges of coronavirus
  • Powell and Mnuchin will lead G-7 emergency call on the coronavirus Tuesday
• Wall Street roars back, sparked by stimulus hopes

Tuesday, 3 March 2020

• Oil lower on coronavirus fears despite Fed rate cut and hopes for OPEC+ output cut
  • OPEC and allies to consider significant oil output cuts as coronavirus hits demand
• G7 fails to deliver specific measures to offset negative economic impact of coronavirus epidemic, global 'flight to safety' in U.S. treasuries:
  • U.S. 10-year yields drop below 1% for first time ever
  • G7 to employ 'all appropriate tools' to combat coronavirus risks
    • Exclusive: G7 to make no direct calls for fiscal, monetary support in coronavirus statement: sources
• World Bank, Fed, Australia central bank minions act to counter economic impact of China's coronavirus epidemic:
  • World Bank announces up to $12 billion in immediate funds for coronavirus
  • Fed slashes rates in emergency move to combat coronavirus risk
    • Powell says coronavirus outbreak poses material risk to outlook
    • Fed virus-driven cut may test new approach to inflation
    • Trump calls on Fed to cut rates further after emergency move
  • Australia's central bank cuts rates to shake off virus fears
• ECB, Eurozone government minions remain noncommittal
  • ECB ready to take 'targeted' steps on coronavirus: Lagarde
  • ECB ready to support economy, but governments must help, Villeroy says
  • No need for imminent ECB action on coronavirus: ECB's Kazimir
• Wall St ends more than 2% lower after Fed surprise rate cut

Wednesday, 4 March 2020

• Oil gives up gains even as OPEC works on big output cut
• Bigger trouble developing in Eurozone, Japan:
  • S&P Global halves eurozone growth forecast, flags gloom for Italy
  • Bank of Japan's Kuroda offers bleak view on economy, warns of damage from coronavirus
  • Over 60% of Japan firms seeing earnings hit by coronavirus: survey
• Fed minions claim to have right policy, but want others:
  • After slashing rates, U.S. Fed has more weapons to fight coronavirus effect
  • In next recession, Fed needs upfront promises, former staffers say
  • Fed's Bullard says policy now in the right place to address coronavirus risks (how does he know?)
  • Fed's Mester says coronavirus uncertainty could lead to demand shock: CNBC
• Market screams for more liquidity:
  • This Wasn't Supposed To Happen: One Day After Fed Rate Cut, Repos Signal Record Liquidity Shortage
• Stocks Climb on Spending to Combat Coronavirus, Biden Primary Victories

Thursday, 5 March 2020

• Oil slides as demand worries overshadow OPEC deal to deepen supply cuts
• Coronavirus economic impact rippling across globe:
  • China says consumer sales steadying after virus hit, trade still tough
  • Shortage of Chinese parts caused $50 billion fall in February's global exports: U.N.
  • Canceled bookings, empty rooms: coronavirus takes toll on tourism
  • Coronavirus hit to airlines could top $100 billion, Flybe collapses
  • California declares emergency over coronavirus as death toll rises in U.S.
  • Term Repo Record Oversubscribed As Market Liquidity Craters
• Wall Street plunges as coronavirus slams bank, travel stocks

Friday, 6 March 2020

• Oil plunges to lowest since 2017 after Russia rejects steep OPEC cut
• Global recession risks have risen due to coronavirus: Moody's
  • Coronavirus infects more than 100,000 worldwide, wreaking financial havoc
• Bigger stimulus developing in the U.S. to reduce pain from coronavirus recession
  • U.S. may take targeted steps to stimulate economy amid coronavirus: Kudlow
  • Once unthinkable, negative Treasury yields enter the realm of possibility
  • Fed needs wider QE mandate to deal with economic downturns: Rosengren (including buying and holding stocks?)
  • U.S. job growth robust before coronavirus outbreak hit shores
  • U.S. should help workers who lose pay if coronavirus worsens: Fed's Evans
• Fed minions speak out on wisdom of emergency half point rate cut:
  • Fed's Kashkari says he supported rate cut as 'insurance' in face of uncertainty
  • Fed's Kaplan says wise to act 'boldly' on monetary policy in face of threats
  • Fed's Mester: Post-meeting statement should be more detailed
  • Fed's Bullard Calls for Alternative Model to Deal With Low Inflation
    • Carnage: Credit, Crude, & The Yield Curve Crushed As Fed Admits 'Credibility Eroding'
• Bigger trouble developing in China:
  • China's first-quarter economic hit from coronavirus looking more severe: Reuters poll
  • China metal inventories scale new highs as demand makes slow recovery from virus
  • China warns metals firms not to race back from virus
• ECB minions spectating from sidelines:
  • European Central Bank seen on hold despite recession risks doubling: Reuters poll
• Coronavirus concerns pummel major indexes as investors flee to bonds

Barry Ritholtz listed the positives and negatives he found in the past week's economics and market-related news.