The S&P 500 On The Edge

The S&P 500 showed it was close to the edge during the Good Friday holiday-shortened trading week. In fact, the latest weekly update to the alternative futures spaghetti forecast chart reveals it still is on the edge of the redzone forecast range:

(Click on image to enlarge)

The current redzone forecast range is based on the assumption investors would be focusing on 2022-Q3 during the weeks it runs, indicating where we expect the actual trajectory of the S&P 500 will range while the accuracy of the dividend futures-based model's forecasts are affected by the echo of the past volatility of historic stock prices it uses as the base reference points to project the future for the index. As you can see, it's running right along the lower edge of that range.

That's because investors had a reason to draw in their forward-looking focus toward the current quarter of 2022-Q2 during the past week. That's because speculation the Fed's next rate hike in May 2022 could be as large as 0.75% took hold early in the week ahead of the latest report on the Consumer Price Index.

As the week played out, the level of inflation proved to be a bit lower than investors were speculating, which meant they continued focusing their attention on 2022-Q3. But the level of the S&P 500 remains at the edge of the lower end of the range we would expect the index to be in that situation.

What would be the risk if investors fully shifted their attention to 2022-Q2 in setting current day stock prices? The dividend futures-based model indicates such a shift would be accompanied by significant drop in stock prices, around 3-7% below their current depressed level. And that drop could happen without any change in the expectations for the S&P 500's dividends and earnings.

And that brings us to 2022-Q2's earnings season, which is just getting underway. Now that we're past the March 2022 inflation report and still ahead of when the Federal Reserve's Open Market Committee will meet in May 2022, the random onset of new information about the business outlook for S&P 500 firms has the most potential for prompting investors to shift their attention back into the second quarter of 2022. At their current level, it wouldn't take much to make that happen, which is why we're describing the S&P 500 as being on the edge.

Speaking of the random onset of new information, here's our sumary of market-moving news headlines that investors absorbed during the past week.

Monday, 11 April 2022

• Signs and portents for the U.S. economy:
  • U.S. consumers up view of inflation, spending in coming year, NY Fed survey finds
  • Oil dives 4%, below $100 on reserves release, China lockdowns
    • Gasoline seen boosting U.S. consumer prices in March
    • OPEC tells EU not possible to replace potential Russian oil supply loss
  • Early signs of cooling housing market seen in some U.S. cities, Redfin says
• Fed minions say inflation will be high through 2023, getting on board with bigger rate hikes:
  • Cleveland Fed's Mester says inflation elevated through 2023 but trajectory will fall - CBS
  • Fed's Evans: half-point hike "worthy" of consideration
• Bigger trouble developing in China:
  • China's inflation tops forecasts as supply pressures worsen
  • China developer Zhenro defaults on interest payments for two offshore bonds
• BOJ minions getting gloomy:
  • BOJ cuts view on most Japan regions, warns on Ukraine impact
• Wall Street stumbles as surging Treasury yields slam growth stocks
  • U.S. yields jump to three-year highs, stocks slide on rate outlook

Tuesday, 12 April 2022

• Signs and portents for the U.S. economy:
  • Oil rises on OPEC warning and easing of Shanghai COVID curbs
    • Gasoline drives up U.S. consumer prices; inflation likely peaked
  • Surging gasoline price boosts March US CPI
    • Soaring prices of online goods may flash another warning for the Fed
• Fed minion confirms 2022-Q2 date for starting QT:
  • Fed's Brainard: rate hikes, balance sheet trim to bring down inflation
• Bigger trouble developing in China, Eurozone, Russia, Sri Lanka:
  • China's March trade growth likely slowed due to virus curbs, Ukraine war- Reuters poll
  • Euro zone banks to tighten corporate credit access on war fears: ECB
  • Russia's economy set for biggest contraction since 1994, Kudrin says
  • Sri Lanka unilaterally suspends external debt payments, says it needs money for essentials
• Bigger inflation in Australia, Japan:
  • Australia business conditions surge in March, inflation runs hot
  • Japan's wholesale inflation stays near record on Ukraine war, weak yen
• ECB minions have questions to answer:
  • Runaway prices and slowing growth: Five questions for the ECB
• Wall St reverses gains, closes lower as aggressive Fed actions loom
  • Stocks climb, U.S. Treasury yields slip as U.S. inflation data fails to surprise

Wednesday, 13 April 2022

• Signs and portents for the U.S. economy:
  • Broad increase in U.S. producer prices underscores tough inflation battle for Fed
  • U.S. mortgage interest rates top 5%, buyers look to lock in rates
  • U.S. crude stocks surge on strategic reserve release
• Fed minions thinking about stagnating economy to stall inflation:
  • Fed's Bullard says central bank must put brakes on economic activity -FT
  • Fed's Waller: need fast rate hikes, but not a Volcker moment
• Bigger stimulus developing in Japan, China:
  • Japan's Feb machinery orders fall for second month, adding to growth fears
  • China's imports unexpectedly fall as COVID curbs convulse trade outlook
    • China's widening COVID curbs threaten global supply chain paralysis
• Bigger stimulus developing in China:
  • China will use timely RRR cuts to support economy, cabinet says
• BOJ minions really want to keep stimulus going, Bank of Canada minions hike rates:
  • BOJ's Kuroda vows easy policy, warns of economic hit from rising import costs
  • Bank of Canada lifts rates, promises more hikes to fight inflation
• Wall Street surges in growth stocks rally; earnings season opens

Thursday, 14 April 2022

• Signs and portents for the U.S. economy:
  • Oil rises on news EU may phase in a ban on Russian oil imports
    • U.S. oil drilling, output moving higher with energy prices
  • Bird flu, Ukraine war push egg prices higher worldwide
  • U.S. companies load up on costly inventories as new supply snarls loom in China
  • Higher gasoline prices flatter U.S. retail sales; consumers remain resilient
• Fed minions locking in half point rate hike expectation:
  • Fed's Williams: 50 basis point hike is a 'very reasonable option' for May
  • Fed aims to bring elevated inflation under control: Mester
• Bigger trouble, stimulus developing in China:
  • China's GDP growth seen slowing to 5.0% in 2022 on COVID hit - Reuters poll
    • Less rice for the same price: inflation bites Asia's food stalls
  • China seen holding medium-term rate steady Friday, RRR cut seen more likely- Reuters poll
  • China set to loosen credit but economic woes may be too deep for quick turnaround
• Central banks ramping up rate hikes in attempts to slow, reverse inflation:
  • The game is afoot: central banks ramp up inflation fight
  • South Korea steps up inflation fight with surprise rate hike
  • Singapore tightens monetary policy to fight inflation, growth slows in Q1
• BOJ minions happy to see inflation stop chronic deflation, ECB minions stand by to watch inflation, may do something about it someday:
  • BOJ's Wakatabe says Japan no longer suffering from sustained price falls
  • ECB closely monitoring inflation expectations, Lagarde says
    • ECB cannot ensure growth, but should stabilize prices - Lindner
    • ECB confirms plans to roll back stimulus; yields fall
    • Euro hits two-year low vs dollar as ECB seen in no rush to hike rates
• U.S. stocks slide as rising bond yields hit growth stocks
  • Flashback: Investors buy tech stocks to hedge inflation, Fed rate hike, Jim Cramer says
    • The hedging strategy doesn't work like Jim Cramer thought it did in this article. It's still a hedge, but a longer term one where investors cash out the tech stocks they bought when the inflation they expected back when they bought them fully arrives and forces fast and furious rate hikes.

The CME Group's FedWatch Tool is still projecting Fed's next moves will be three consecutive half point rate hikes in May, June, and July (the first two in 2022-Q2, the third in 2022-Q3), two quarter point rate hike in September (2022-Q3) and November (2022-Q4), followed by a half point rate to close out 2022 in December (2022-Q4).

Meanwhile, the so-called "Blue Chip Consensus" forecast for 2022-Q1's GDP has converged with the Atlanta Fed's GDPNow tool's latest estimate of real GDP growth, which is unchanged from last week's 1.1%.